BBA Business Organisation External Reconstruction Chapter Wise Notes
BBA Business Organisation External Reconstruction Chapter Wise Notes :- In This Article You Can Find Meaning External Reconstruction Business Organisation Notes and Forms of Business organisation, Points for a Good Forms of business Organisation, Difference between External Reconstruction and Amalgamation That Its Is Best Topic of Business Organisation Study For Salient Features of a Company BBA 1st Semester Year . Here You Find Topic Wise,Chapter Wise, Subject Wise Study Material BBA And other Links of Related to the Business organisation . How To Learn BBA Business organisation Notes Forms of Business organisation, Points for a Good Forms of business Organisation, Business combination, You Here . Thanks For Read This Article.
External Reconstruction (BBA Notes)
External Reconstruction : Reconstruction means reorganisation of a company ‘s financial structure .in reconstruction of the company ,usually the assets and liabilities of the company are revalued and the losses suffered by the company are written off by a deduction of the paid up value of shares and/or varying of the right attached to different classes of share and compounding with the credit it may be done without liquidating the company and forming a new company in which case the process is called internal reconstruction. However, there may be external reconstructions in which case the undertaking being carried on by company is transferred to a newly started company consisting substantially of the some shareholders with a view to business of the transferor company being continued by the transferee company. An attempt is made that the newly started company has a sound financial structure and a good set of assets and liabilities recorded in the books of the transferee company at their fair values.
Difference between External Reconstruction and Amalgamation
From the point of view of an accountant, external reconstruction is similar to amalgamation in the nature of purchase; the book of the transferor company are closed and in the books of the transferee company, the purchase of the business is recorded. But otherwise external reconstruction and amalgamation differ as follows :
- In external reconstruction, only one existing company is involved where as in amalgamation there are at least two existing companies which amalgamate.
- In external reconstruction, a new company is certainly formed whereas in amalgamation new company may be formed or in the alternative one of the existing companies may take over other amalgamating company or companies and no new company may be formed.
- The objective of external reconstruction is to reorganizes the financial structure of the company. On the other hand, the objective of amalgamation is to cut competition and reap the economic large scale.
Short note on unrealised Profit on stock
Unrealized profit on Stock : The question of the mutual owings on account of sale goods may be connected with goods sold by the transferor company to the transferee company or vice versa but still remaining unsold. It should be remembered that the transferee company will acquire all the stock of the transferor company, including the goods sold by it to the transferor company and that in the books of the fransferor company, the stock will be recorded at invoice price (i.e., including the profit charged by the transferee company). On re-acquisition of the goods, the profit must be eliminated. The method is simple. While making the entries for the acquisition of the business of the transferor company, the figure of stock should be reduced by the profit charged by the transferee company—the figure of goodwill or capital reserve in the case of amalgamation in the merger will be automatically get adjusted.
But if it was the transferee company that had purchased goods from the transferor company and the goods or part of them had remained unsold, the way to elimination the unrealized profit charged by the transferor company is to debit general reserve or profit and loss account in the case of amalgamation in the nature and to credit stock account by the amount of unrealized profit.
Advantage of Business Combinations
- Elimination of Wasteful Competition: The businessmen who were trying to beat each other in the market prior to the combination, now work together under one management. This ends wasteful competition enables optimum utilization of variable resources.
- Benefits of Large Scale Business: Specialisation, use of waste and by-products, automation, standardization and uniformity of quality, savings in transport, pooling of patents, arrangements for repairs and maintenance, research and development, rationalization, etc., are possible due to large scale business.
- Benefits of Monopoly: Through combinations, businessmen may secure the advantages of reduced costs of production and distribution due to control over the market and the steady demand and elimination of cross freights.
- The balance between Demand and Supply: Better adjustment between demand and supply reducing trade cycles. Combinations facilitate foreign trade, it is easier for the government to control a few combinations than a large number of small firms.
- Efficient Management: Functional specialization, combined judgment, lower overheads, comparative accounting, office mechanization, etc., are possible if a big unit is formed by merging small units.
- Financing: Higher goodwill and better security resulting is more economical financing, plowing back of profits, internal adjustment of funds, proper utilization of capital. Greater strength and stability during economic crisis etc.
- Greater Stability and Growth: Greater strength to withstand depression and other economic arise is resulting in greater stability and growth.
- United Action: Spirit of co-operation and mutual understanding among competing for business firms and united action against common problems.
- Economical use of Sources: United control enables economical use of resources and improvement in the efficiency of management. The pooling of knowledge and experience becomes possible.
- To become a Big Businessmen: The person, who dreams of becoming a big businessman, the business combination is a good medium of fulfilling his desire. With the help of business combination, a person can reach on the top in the business world.
- To face Marketing Problem: Due to the expansion of the market, marketing problems arise. Marketing problems mean advertisement, distribution, after sale services, etc. A single unit faces difficulties in solving these problems. But if a business combination is there, then they can be faced easily.
- Use of Modern Technology Possible: Because of combination, all factors are easily available. Hence, benefits can be availed by using the modern technique. Its main advantage is to produce a good quality product at a low cost.
- Benefits from Foreign Intelligence Possible: By forming a business combination with foreign businessmen, benefits from their intelligence can be enjoyed.
- Easy to Implement the Government Policy: Business combination eliminates the unorganized form of business. The government faces a problem in controlling the small units. The government cannot implement its policies on them. But once these units are organized, the government can easily control them. On controlled units, policies can be easily implemented.
Disadvantages of Business Combination (BBA Notes)
- The exploitation of Investors and Suppliers: Monopoly concerns lure investors by presenting a rosy picture of their proposal and exploit genuine investors. As the sole or dominating buyer, a monopoly house dictates prices of materials and machinery to its suppliers. Big businessmen may indulge in speculation to manipulate share prices at the stock exchange.
- Evils or Large Scale Business: Large scale business gives birth to the trend of monopoly. Very few people control the market for various products. They charge the prices of these products as per their own wish and exploit the consumer. In this manner where at one side large scale business, monopoly being the main problem.
- Over Capitalisation: Combinations of a permanent and long-term nature tend to be over-capitalized. Over-capitalisation is against the interest of the combination, the shareholders and the community at large. Large sums may be paid for intangible assets of combining firms which may fail to give proportionate returns. There is an inefficient use of capital resources.
- Ruining of Small Business: In case of monopolistic combine forces, small competitors to go out of business. By adopting price-cutting and other unfair means, it squeezes every possible competitor and roots out all opposition. Giant combines block entry of fresh blood into the industry.
- The exploitation of consumers: by restricting output, the prices of their products as per their own wish exploit consumers. Due to its monopoly power, it may operate in a conspiracy against the consumer.
- Greater Risk: Due to the concentration of resources, risks are increased after combination, there are risks also due to the public distrust, danger to legal action, possibility of inefficient and dishonest management. All eggs are put in one basket, the contract of the combination may not be kept and every unit places itself at the mercy of erstwhile rivals.
- Instability in the Industry: A combination creates instability by not adjusting output and prices to changing market conditions. Failure of large combine results in large scale unemployment and other disturbances in the economy.
- Slow Economic Progress: Monopolies do not care for the development of new methods and techniques. They tend to discourage innovation and creativity because of guaranted profits. They try to block new inventions that involve dislocation of existing conditions.
- The concentration of Economic Power and Political Corruption: Combinations lead to concentration of wealth in a few hands. Monopolists try to gain special favor from the government through political corruption and pose a danger to democracy. Economic power gives control over the social life of people and equality of opportunity is denied.
- Uneven Distribution of National Resources: By operating at less than the optimum size, a monopoly combine size, a monopoly combine misdirects the productive resources of the society and thereby operates against the public interest.
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