COMMERCE.

CHARPTER ONE. INTRODUCTION.

DEFINITION AND SCOPE OFCOMMERCE.
DEFINITION OF COMMERCE,
Commerce has the following definitions,

 Commerce is trade and aids to trade.

 Commerce is the study of the way man organizes the distribution and exchange of goods and
services so as to satisfy his needs.
The man aim of commerce is to bridge the gap between the producer and the consumers.
Some basic terms to consider in commerce are.
Trade and exchange. Trade is the buying and selling of goods and services with an aim of making
profits.
Exchange refers to giving out a commodity or service in return for other goods or services or for
money. Exchange leads to commerce..
The scope of commerce.
This is the extent to which commerce is studied. It refers to the branches of commerce. The
branches of commerce can be illustrated using the chart below;
The scope of commerce;
Commerce

Trade Aids to trade

Transport
Insurance
Home trade foreign trade Advertising/sales promotion
Warehousing
Retail trade wholesale Export Entreport import market research
Trade trade trade trade trade Banking.
. Communication

Trade. Trade is the buying and selling of goods with an aim of making profits.
There are two types of trade that is home trade and foreign trade.
Home trade/ internal trade/local trade.
Home trade refers to buying and selling of goods and services with in a country.
Home trade is divided into two types

 Retail trade: this is the buying and selling of goods and services to the final consumer.
 Wholesale trade: This is the buying of goods in large quantities from manufacturers and
selling them to other traders usually retailers.
 FOREIGN TRADE / INTERNATIONAL TRADE

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 This is the buying and selling of goods between and among countries.
International trade is of three types
 Export trade: This is the selling of goods and services to other countries. The goods or services
sold to other countries are called exports .The people who sell the goods and services to other
countries are exporters.
 Import trade: this is the buying of goods and services from other countries. Goods or services
bought from other countries are called imports. The people who buy goods or services from
other countries are called importers.
 Entre-port trade/Re-Export trade: This is the selling of goods previously imported to other
countries. It involves re-exporting previously imported goods
AIDS TO TRADE
These are activities or services which facilitate trade. They are;
 Banking: This involves accepting people’s deposits, safeguarding them, making them available
to the owners on demand and offering other financial services to the public like lending
money.
A bank is a financial institution which accepts people’s deposits, safeguards them, gives them
to the owners on demand and offers other financial services to the public/society. It is an
institution in which banking activities take place.
 Transport: This is the transfer or movement of goods and services from one place to another
 Communication: This is the transfer or conveying of messages/information from one place to
another or person to person.
 Insurance: This is a service which under takes to safeguard and compensate the few business
men or organizations that might suffer loss due to risks insured against.
 Advertising/sales promotion: This is a service of making the public aware of the availability of
goods or services in the market with an aim of promoting sales.
 Ware housing: This is the provision of storage facilities for finished goods and raw materials
on their way from production to the consumer or until they are demanded.
 Market research: This is the process of finding people’s opinions about a product or service
ready in the market or yet to come in the market.

IMPORTANCE OF COMMERCE

Commerce has the following importance to the development of a country.

 It links producers to consumers. This is the main aim of commerce
 It creates utility that is it adds value to the goods and services produced. It is part of production
without which production is not complete.
 It helps students to acquire knowledge of operating businesses.
 It facilitates international trade i.e. countries are able to trade with each other.

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  It creates employment opportunities to people involved at various levels in the distribution of
goods and services like traders, service providers, etc.
 As a subject it prepares learners for higher levels of studies e.g. economics, business studies etc.
 It helps in keeping projects/ people’s money or funds easily and provides finance for business e.g.
through banking.
 It enables business men to be compensated in case of financial loss due to risks that they insure
through insurance servicers.
 It helps in providing storage for finished goods and raw materials through warehousing.
 It helps in movement of people, goods and services from one place to another through transport.
 It helps business men/ producers to get public opinions about their goods which help them to
improve quality through market research.
 It helps people to receive and pass information and payments from one person to another.

Reasons for studying / teaching commerce.

The following are reasons for studying/ teaching commerce;

 To provide students with knowledge that will enable them understand business environment in
Uganda.
 To enable students to appreciate the impact of commercial activities on the society in which they
live e.g. pricing, inflation, etc.
 To equip students with the knowledge of commercial language and terminologies commonly used
in business in Uganda.
 To encourage students to develop neatness and orderliness paying attention in their everyday
work.
 To help students acquire basic commercial knowledge for the purpose of employment in the
commercial related jobs like accountants, managers, etc.
 To acquire commercial knowledge and skills in order to carry out commercial activities/business
in future.
 To introduce students to a wider field of study at a higher level egg Economics, entrepreneurship,
business administration.
Differences;
I. Differences between commerce and production;
Commerce is the trade and aids to trade while production is the creation of utility. It involves all
activities which value to a product. Hence commerce is part of production.
II. Differences between trade and business.
Business is any activity done to get profits. Trade is buying and selling of goods and services.
Trade is therefore part of business.
III. Differences between commerce and economics.

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 Commerce includes the sturdy of trade/exchange and those activities that facilitate trade. But
Economics on the other hand includes the study of how to use the scarce resources to provide
goods and services that satisfy human needs and wants. Hence commerce is part of economics.
Human needs and human wants.
Human needs are things that must be available for a human being to survive and live e.g. food,
shelter; clothes, water and medical care are some of the basic needs. Human wants are things which
make human life comfortable for example comfortable house, vehicle, comfortable chairs, security
etc.
Characteristics of human wants/needs.
i. They are un limited or endless
ii. They are recurrent that is they cannot be satisfied once and for all. Once they are satisfied
they tend to re occur.
iii. They are dynamic that is they change over time.
iv. They are complementary that is needs that occur together are satisfied together for example
car and fuel.

v. Human needs are primary and secondary needs.

Primary /basic needs are needs that must be satisfied first before the secondary needs. They
are needs that make life possible e.g. food, clothes, water, shelter, medical care, security, sex.
Secondary needs are also luxurious needs. They are needs that make life comfortable for
example, cars, phones, television set, radios, necklaces, watches, etc.
Human wants are many and insatiable because the resources to produce the goods
and services to satisfy them are limited. This brings the concepts of scarcity, choice and
opportunity cost.
 Scarcity. This means being limited in supply of the resources that are used to produce goods
and services
 Choice. This means making a right decision either to produce a particular commodity,
consume it, or otherwise.
 Opportunity cost. This means the next best alternative foregone when choice is made.
Human needs and wants are satisfied by consumption of goods and services which are made
available by production.

1.4. PRODUCTION.
Production means;
I. Creation of utility.
II. The transformation of raw materials into finished goods that can satisfy human
wants /need.
III. Making goods available in the right form, time and place.

 Utility;

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 It is the ability of a good/service to satisfy human needs. It is the usefulness in the commodity.
Production aims at satisfying human needs. All activities that add value in a good are productive
activities e.g. Industry, transport, ware housing, etc. Production ends when goods have reached the
final consumer.

Types of utility
The following are types of utility
 Place utility: this is utility created by having a commodity at a place where it is needed.
 Form utility: this is utility created by having a commodity in the form needed by the consumer.
 Time utility: this is utility created because the commodity is at a place at the required time.
 Possession utility: this is a utility created when the commodity is with the consumer.
Commodity;
This is anything/item produced to satisfy human needs.
Types of commodities produced:
There are two types of commodities produced and these are;
1) Goods
2) Services
Goods: These are tangible items that are produced to satisfy human needs e.g. clothes, vehicles, food
stuffs, etc. These are intangible items/commodities that are consumed to satisfy human needs for
example cooking, driving, hair dressing, teaching, treating the sick, etc.
Types of goods;
There are two types of goods produced and these are;
1. Producer goods: these are goods produced to be used in the production of other goods and
services examples include vehicles, machinery, buildings, tools, furniture etc. they are also
referred to as capital goods.
2. Consumer goods: these are goods that are produced to satisfy human needs. They are finished
goods to be used by the final consumer to satisfy his needs e.g. personal cars, personal houses,
clothes food stuffs etc. The distinction between capital goods and consumer goods lies mainly on
the person using them or use of the commodity
There are other types of goods but they all fall in these two categories;
i. Public goods; these are goods which are produced and provided by the government at
reduced or free price like roads ,public hospital, public schools, public vehicles etc. The
consumption of them by one person does not prevent others to consume them.
ii. Private goods; these are goods that are owned by individuals and their ownership restricts
others from consuming them e.g. private cars, personal house, personal clothes etc.
iii. Free goods; these are goods which are freely available by nature or government to every
person and the consumption of which does not restrict others from using them e.g. sunshine,
air, rainfall etc.

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 iv. Economic goods; these are goods that have value and consumed at a cost or price e.g.
clothes, food, chairs, a car, house etc.
v. Durable goods; these are goods that last for a long time and are usually consumed for a long
period of more than a year. Most capital goods are durable and some consumer goods are
durable depending on the way they are handled and used e.g. some get exhausted in use,
others only depreciate or get worn out like motor cars, radios, chairs, house hold utensils etc.
vi. Non-durable goods; these are goods that last for a short time and get exhausted or
depreciate so fast as they are consumed e.g. food stuffs etc. They are also called perishable
goods.
vii. Inferior goods; these are goods whose demand/ consumption is lower when consumers
income is higher and increases when income reduces.
viii. Superior goods; they are goods only consumed by higher income earners.
ix. Giffen goods. These are goods consumed highly when their prices are high but bought less
when the prices are lower.
x. Substitute/supplementary goods. They are goods that provide same satisfaction to the
consumer. E.g. bean and peas they are also called competing goods
xi. Complementary goods. These are goods that are demanded together i.e. jointly demanded
for example vehicle and fuel, vehicles and tyres. Pen and paper

Services. These are intangible items/commodities that are consumed to satisfy human needs for
example cooking, driving, hair dressing, teaching, treating the sick, etc.

Types of services;

There are two types. These are;

 Direct services; these are services provided by individuals e.g., services of Doctors, Teachers,
engineers, drivers, etc.
 Commercial services. These are services which involve trade and aids to trade such as transport,
ware housing, retailing, wholesaling, banking, insurance, etc.

Types of production.

There are two types of production. These are,

i. Direct production
ii. Indirect production.
 Direct production; this is the production of goods and services for one’s own consumption. Hence
the producer makes goods or services for his or her own consumption. It is also called subsistence
production e.g. growing one’s own food, making one’s own hoes, chair, cloths etc.
Features of direct production;

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 A few goods are produced,
 There is no specialization that is a variety of goods are produced but each in small numbers/
quantities.
 There is no exchange that is production is for one’s own use.
 The quality of output is usually low since it is not for sale.
 Personal labor/family labor and not skilled labor is required.
 Indirect production. This is the production of goods and services for exchange/sale that is
production by specialization.
Features of indirect production;
 Production is in excess that is surplus output which can be exchanged for other goods or money.
 There is exchange due to specialization.
 There is specialization that is one or a few types of goods are produced in large quantities.
 High quality output is produced due to use of specialists.
 Trained or skilled labor is highly used in the production.
 It involves use of machines and specialized tools in the production.
 A firm and an Industry.
 A firm ; this is the smallest unit of an industry in which production takes place. Examples include;
kakira sugar works, lugazi sugar works, etc.
 An industry. This is a group of firms producing similar goods examples include, textile industry, oil
industry, sugar industry etc.
 Stages of production / types of industry / production occupations.
Productions are activities an individual can get involved in to earn a living. They are the levels or
stages in which production is done, these include the following;
a. Primary production/ industry/extractive industry; primary production this is the extraction of
raw materials from nature. It is also called extractive stage/industry. It is the first stage in the
production process. Examples include lumbering, quarrying, mining, fishing, farming, brick
making, hunting e.t.c
b. Secondary production stage: This is the second stage in production. It is where raw materials
from primary stage are turned into useful form which can satisfy human needs. It includes
manufacturing, processing industries and constructive industries.
 Manufacturing industries are those industries in which raw materials are made useful to man.
Examples include; sugar industry, textile industry e.t.c
 Constructive industries are those industries in which raw materials are put together or assembled
to form new commodity example include; road construction, construction of railway line,
buildings and bridges.
c. Tertiary production/industry: This involves the production or provision of services both direct
and commercial services
 BRANCHES OF PRODUCTION

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 Production

Industry commerce Direct service

extractive secondary trade aids to trade doctors lawyers teachers

. (primary) production transport
. industry banking
. constructive manufacturing Insurance
. industry industry communication
. Home trade Foreign trade Advertising /sales promotion
. Ware housing
. Retail wholesale Export Entreport Import market research
. trade trade trade trade trade

SPECIALIZATION AND DIVISION OF LABOUR.

Specialization. This is where countries, regions, or individuals concentrate on the production of
only one or a few commodities where they have best abilities so that each produces in excess and
they exchange. The main reason for specialization is to increase output,

Division of labor. This is the distribution of activities to different individuals in the production of a
particular commodity for example, in the making of a chair, one does the cutting, the other planning,
another joining the pieces cut. Division of labor leads to specialization. When one concentrates on a
particular stage of production over a long period, he/she becomes a specialist.

Types of specialization;

The following are the types of specialization;

Specialization by craft/skill/ profession. This where an individual concentrates on the production of

a commodity in which he/she has acquired a particular skill due to training, experience or talent
examples include, teaching , nursing, building etc.

i. Specialization by stage/ process. This is where an activity is broken down into stages each of
which is being worked on by different people in the production of a particular commodity
ii. Specialization by area./Region. This where an or region concentrates on the production of a
particular commodity that she can do best because of the available resources and exchange
with other producers
iii. Specialization by commodity/ service. This is where an individual concentrates in the
production of a particular commodity/product/ service. Example, a farmer specializing in the
production of bananas etc.

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 iv. International specialization or specialization by country. This where countries concentrates
in the production of commodities in which they have best cost advantages than others so that
they exchange for those they do not produce.

Advantages of specialization. They are;

 It saves time which would be wasted while changing tools, place and training. Ie it reduces on
labor movement.
 It leads increased output or mass production because all resources are put to production of one
commodity.
 It leads to acquisition of skills and experience or confidence in production due to repeated doing
of the same job. Hence practice makes perfect.
 It leads to production of high quality products because of use of machines and skilled labor.
 Standardized goods are produced due to use of machines.
 It encourages trade and exchange due to surplus output.
 It enables use of specialized machines and equipment which also leads to quality output and mass
production,
 It improves on standard of living due to increased output and quality goods and services.
 It facilitates innovation and invention or creativity.
 It facilitates research for better quality and market.
 It improves on working relationship because of interdependence among the workers.
 It reduces on fatigue due to reduced movement from one place to another.
 It increases degree of choice because workers are able to do activities in which they are suited.
 It leads to maximum/ effective utilization of resources. Hence no wastage of resources.
 Disadvantages of specialization.
The following are the disadvantages of specialization;
 It leads to boredom due to monotony of work.
 Leads to mass production. This may result into excess output which may be wasted due to
lack of market/ demand.
 It may lead to exhaustion of resources due to over exploitation.
 It may lead to unemployment due to over dependency on one product which if market fails
specialists lose jobs. Also machines replace human labor that is technological unemployment.
 It leads to loss of craftsmanship due t over dependence on machines in production.
 Breakdown or absence of a worker at one stage affects the entire production process.
 There is lack of individual responsibility or accountability because work is completed by
different workers.
 A fall in demand affects the specialize in industry or individual as it can lead to reduction in
income and loss of employment opportunities.

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Relationship between specialization and exchange.

The following are the relationship between specialization and exchange;

i. Specialization is meaningful only if there is exchange

ii. Specialization leads to mass production which leads to exchange.
iii. Excess output due to specialization can be disposed off with exchange.
iv. A person can get what he or she does not have due to specialization by exchange.
v. Specialization and exchange lead to economic growth.

Factors of production.

These are resources or in puts or things used in production of goods and services. They include; Land,
labor capital, Entrepreneurship and organization. They are also referred to as Agents of production.

 Land . This is a gift of nature including all things provided on, under and above the earth’s surface.
For example soils, mineral ore, open water bodies, the space, vegetation and climate. The reward
for land is rent.
Features and uses of land
Features
 It is subject to diminishing returns.
 It is limited in supply/scarce.
 It is geographically immobile
 It is occupationally mobile
 Its supply is fixed ie, cannot be increased or reduced in supply.
 It is the most important factor of production

Uses of land

 All features of life are on land. constructions like roads, industries, and buildings are o
 All n land.
 It is a source of raw materials for industries;
 It is also a source of food for mankind and other creatures.
 Labour. This both mental and physical human effort employed in production of goods and service.
The reward for labor is wages or salary. Labor includes skilled, semi-skilled or unskilled human
effort employed in production.
Skilled labor is fully trained labor, semi-skilled is less trained while unskilled labor is not trained at
all for a particular job or activity, labor is call so only when it is employed in production of goods
and services and is paid for.
Labor is important because it provides the human work force required in production.

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 Capital. This is wealth used in creation of further wealth. Also capital are already made goods
used to produce other goods and services for example machinery, tools, furniture, buildings, etc.
The reward for capital is interest.
Capital is important for it is used;
To finance the project or production process, for example paying the factors of production,
meeting the day to day costs during production for example; transport, salaries, electricity, etc.,
buying the required materials and fixed assets.
 Organization/ management/administration. This is a factor employed because of its skills to co-
ordinate and direct other factors but does not directly get involved in the production processes.
For example managers, accountants, secretaries, etc. The reward for organization is salary.
Organization ensures that production takes place by co-coordinating all the other factors and
reports to the entrepreneur.
 Entrepreneurship. This is an undertaking of an investment, a project or production. It involves
buying land and paying for other factors of production and bearing risks of production or loss and
enjoys all profits when successful. The reward for entrepreneurship is profits. An entrepreneur is
a person with the entrepreneurship skills.
Functions of an entrepreneur.
 He is the risk taker. He takes the responsibility of profits and losses of the project or production,
 He is responsible for searching for the site to have the production firm/business located.
 He combines and employs all the other factors of production like land, labor and capital to make
production possible. Hence coordinates the production process
 He controls and manages other factors of production ie he looks after the staff discipline, and
welfare, finances and pays for the necessary resources like raw materials.
 To make decisions pertaining running of business or production like what to produce, when, how,
how much to produce and at what price.
 To make innovations and discoveries about ways to improve on production of goods or services
and business.
 Net working with other entrepreneurs,

LOCATION AND LOCALIZATION OF INDUSTRIES.

LOCATION OF AN INDUSTRY;

This means the process of setting an industry in a particular area or site.

Factors considered when setting up an industry;

 Availability of the land for the site and expansion of the industry.
 Availability of raw materials especially for industries whose raw materials are bulky or perishable
so as to reduce on transport costs.eg cement industry, sugar industry etc.

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 Availability of market. Industries whose finished goods are bulky or perishable are set near their
markets to reduce on transport costs.
 Availability of power to drive machines eg hydroelectric power.
 Availability of water to cool and wash machines.
 Availability of labor to work in the industry especially skilled labor.
 Government policy which may encourage or discourage location of the industry. The government
influences location of industries in a particular area for economic reasons, like regional balanced
economic growth, political reasons eg. Rewarding voters after winning elections.
LOCALISATION OF INDUSTRIES:
This is the concentration of industries producing related goods in the same area.
 Advantages of localization of industries:
The following are advantages of localization of industries:
 It makes easier for government to provide infrastructure and social services that support further
industrial establishment eg; schools, health services, roads, etc. This is made possible at lower
cost.
 It is possible to establish interdependence between industries i.e by products of one industry may
be used as raw materials of another industry.
 It expands employment opportunities i.e. it attracts a particular category of labor in the localized
area.
 There is provision of security by government and other stake holders in the localized area.
 It encourages growth of centralized markets with in the area/urban center development.
 It improves standard of living and welfare of the people directly employed by industries and other
related activities.
 It is easier for the government to provide proper control and supervision of industries.
 Economies of scale may be enjoyed. This may lead to reduced costs of production and reduction
in price of final products.
 It may encourage commercialization of agriculture since it creates market for agricultural
products.
 It is a source of income for the government through taxation.
 It promotes competition which results into quality goods at low prices.
 It brings goods and services closer to consumers and traders in the localized area.
 It attracts specialized/auxiliary services e.g. insurance, banking, etc. into the localized area.

 Disadvantages of localization of industries:

The following are disadvantages of localization of industries;

 Costs of living increase as prices increase in localized area.

 It may cause traffic congestion and lack of adequate housing.

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 It leads to rural urban migration causing disparity in development.
 It may lead to exhaustion of resources.
 It leads to pollution and environmental degradation due to the industrial fumes and wastes.
 It leads to breakdown of traditional norms and customs due to urbanization.
 It leads to development of slums and their associated problems like theft, poor hygiene etc.
 It leads to high spread of diseases due to pollution and congestion in slums.
 It leads to uneven distribution of industries.
 It may lead to displacement of people.
 It may lead to open urban unemployment .i.e. people move to towns looking for jobs.

 Delocalization of industries.
This is the distribution of industries or a particular type industry to different parts of the country
due to natural or political reasons.
 Reasons for delocalization
 To reduce rural urban migration.
 To create employment opportunities in the different parts of the country.
 To have a balanced regional economic growth in the country.
 To develop infrastructure in the different parts of the country.
 To increase Tax base in the country from people in the different regions.
 To reward politicians or voters after winning election of the party in the government.
 To create market in the different parts of the country especially for agricultural products.
 Advantages of delocalization of industries.
 It controls migration of large number of people from one part of the country to another.
 It leads to balanced regional economic development ie parts of the country attain a certain level
of development.
 It results in reduced development of slums and associated problems of localization like social
evils.
 It reduces the level of un employment since people in a particular region compete for jobs.
 The rate of air or water pollution in an area will reduce
 Reduces cases of traffic and human congestion associated with urban areas.
 It encourages development of social infrastructure e.g. schools, hospitals.
 Promotes utilization of local resources.
 Spreads risks of concentrating industries in one area in case of wars ,famine etc.
 Brings products closer to the people in the locality ie reduced costs
 Disadvantages of delocalization of industries
The following are the disadvantages of delocalization of industries.
 High costs of production due to limited raw materials necessity their transportation from
other areas.

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  High cost of labor which may have to be obtained or hired from other distant places.
 High initial cost of establishing the necessary infrastructure e.g. roads, power, water,
telecommunication facilities etc.
 Limited local markets for the products hence high marketing cost like transport, advertising,
market research etc.
 May encounter resistance from the community.
 Displacement of people by the raw industries.
 Suffocates the development of linkages of industries that depend on each other e.g. cooking
oil industries may be set in different areas.
 Industries may not enjoy economies of large scale operations because they are scattered.
Foot loose industries: These are located anywhere without referring to any factor such as
transport, raw materials etc.
Industrial inertia: This is the continued existence of an industry in a particular place even
when the original factors that influence its location no longer exists.
 CONSUMPTION:
This means putting a commodity to its intended use.it refers to destruction of utility because as a
commodity is utilized it loses value or utility.
 Factors influencing a buyer to buy a particular commodity;
The following factors influence a buyer to buy a particular commodity;
 Price of a commodity: A higher price discourages a buyer to buy compare to a low price.
 Prices of related goods: e.g. when the substitute price is low it influences the buyer to buy it
instead of the commodity in question. In case of a complimentary good, when the price is low
more of it is bought.
 Income of the buyer: High income level leads to purchase more of the commodity compared
to when the income is low’
 Tastes and preferences: A buyer will purchase a commodity which he/she prefers compared
to others where he/she has negative tastes and preference.
 Quality of the commodity: a buyer will chose to buy a commodity due to its good quality.
 Convenience: A buyer will buy a commodity because it is conveniently situated as presented
by the seller.eg goods bought by hawkers at home or near the customer.
 Government policy: A buyer will buy a commodity because it is supported by the government
and leaves one which is discouraged e.g. when its highly taxed.
 Availability of the commodity: A commodity will be bought by a person because its available
compared to one which is scarce.
 Habit of the consumer: e.g. addicts consume or buy more of the commodity for which they
are addicted even when the price is high.
 Level of advertising: A buyer will buy a commodity because its highly advertised compared to
one which is not advertised.

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  Bandwagon effect: A buyer will buy a commodity because of influence of other people who
may have bought a similar one.
 Terms of payment: That is whether cash or credit.
 Method of payment: This is cash cheques, bill of exchange etc.
 Provisions of after sales services: These include repair, transport, guarantee etc.

DEMAND.

This is the quantity of a commodity consumers are willing and able to buy at a particular price
and time. It is the willingness backed by ability of a consumer to buy a commodity at a given
price and time.

The law of demand;

The law of demand states that the higher the price the lower the quantity demanded and the
lower the price the higher the quantity demanded other factor remaining constant. The law
explains the relationship between price and quantity demanded only. It explains why the
demand curve slopes downwards from left to right. That is negative slope of the demand
curve.

The demand schedule. This is the numerical relationship between the quantity demanded and the
price. It shows a table of the quantity demanded at varying prices in the market.

Sample of a Demand schedule..

Price of the commodity x in shs. Quantity demanded in kg.

1,000 20
2,000 15
2,500 10
3,000 8
3,000 5
4,000 2
The demand curve.

The demand curve is a locus of points or a line drawn joining different points demanded at particular
prices. It is down sloping from left to right.

Sample of a demand curve;

Price D

p2

Demand curve

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 p1

o Q1 Q2 Quantity demanded.

At a lower price P1 a higher quantity Q2 is demand and at a high price P2 a low quantity Q1 is
demanded.

 Factors influencing quantity demanded.

The following factors influence quantity demanded;
 The price of the commodity; when the price of the commodity is high, less is demanded and at a
low price more is demanded.
 Level of income of the consumer.; at a high income more is demanded and less is demanded
when the consumer’s income reduces.
 Prices of other related goods. These may be substitutes or complementary goods. In case of
substitute goods, as the price of the substitute increases, the demand for the commodity
increases and when it lowers the demand for the. Commodity also lower. In case of
complementary goods when the price a complement is high the demand for the commodity is
also low and if the price of the complement lowers the demand for the commodity increases.
 Tastes and preferences of the consumer. In case of positive taste and preferences, more of the
commodity is demanded and when it is negative, less is demanded.
 Seasonal changes. Some goods are demanded more in particular seasons for example, umbrellas
during rainy than in dry seasons. And success cards during examination periods.
 Size of the population. When the population is high more goods are demanded compared to a
low population size.
 Government policy. When the government supports consumption of a commodity for example by
subsidizing consumers, more of it is demanded . but when it discourages its consumption for
example through over taxation or total ban, less is demanded.
 Habit of the consumer. When the consumer acquires a habit to consume a commodity more is
demanded even when the price is high e.g. addicts.
 Expectation of future price changes. When the consumer expects the price of the commodity to
increase in future more is demanded now and when the price is expected to lower less is
demanded now.
 Level of advertising and salesmanship. When there is high advertising more gods are demanded
than at a low level of advertising.
 Level of supply of the commodity. When the commodity is abundantly, more is demanded than it
is scarce.
 Level of distribution of income. When many people are high income earners, demand of goods
and services is high but low when the majority of the people are poor.

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 Amount of money in circulation. A lot of in circulation influences people to buy more goods and
services compared to when money is so scarce.

Supply.

This means the quantity of goods and services traders or producers are able to bring to the market at
a given price and period of time.

 The law of supply.

The law of supply states that the higher the price, the higher the quantity supplied and the lower
the price the lower the quantity supplied other factors remaining constant.
The supply curve.
A supply curve is a locus of points showing the relationship between quantity supplied and price
of a particular commodity with a given period. The supply curve is positively sloping fron right to
left. s
Price
. P2
Supply curve

P1

Q1 Q2 Quantity supplied
.

 Factors influencing supply of a commodity in the market

The following factors influence the supply of a commodity in the market.

 Price of the commodity. When the price is high the quantity supplied is also high compared to the
low price.
 The cost of production. Decrease in cost of production, increases the quantity supplied compared
to when the cost of production is high.
 Number of producers. A large number of producers for a commodity increases supply compared
to small number of producers,
 The price of other related commodities that is substitutes and complementary goods.in case of
substitutes, an increase in the price of substitutes leads to a decrease in the supply of a
commodity compared to a decrease in the price. In case of complementary goods, an increase in
the price of complementary good leads to supply of the commodity compared to decrease in
price.
 Gestation period. Long gestation period reduces supply and short gestation period leads to an
increase in supply of the commodity in the short run when its price increases.
Gestation period is the period it takes for the commodity to be ready far consumption.
 Natural factors. Especially for agricultural products. For example bad weather leads to a low
supply and favorable climatic conditions leads to a high supply.

17
 Government policy. For example taxation leads to low supply and subsidization leads to high
supply.
 Political environment. Political stability leads to increased supply while political instability
decreases supply.
 Objectives of the producer or firm. If the producer’s objective is to maximize sales supply is high
compared to if the objective is to maximize profits.
 Working conditions/ environment. Favorable working conditions of the workers enable them to
produce more and increase supply for goods or services compared to poor working conditions.
 Demand/size of the market. An expansion in the market for a commodity increases supply and it
decreases with decrease in market/demand for the commodity.
 Expectation of future price changes. When future price of the commodity is expected to increase
it leads to low supply compared to when the price is expected to reduce.

 MARKET.
A market is an arrangement between buyers and sellers to exchange goods or services in a given
period.
 PRICE.

Price is the value of a commodity expressed in terms of money. It is the amount of money at which a
commodity is sold or bought in the market.

Price determination in the market.

Prices in the market are determined by the following methods.

 Haggling/ Bargaining. This involves the seller setting the price but continues to reduce as
the buyer increases it until they agree to a particular price.
 Forces of demand and supply. In a free / market economy, where the demand meets
supply an equilibrium price is formed, the equilibrium price in the market at a particular
time is the market price and if it is for a long period it is a normal price.
 Government legislation. The government can set a maximum price to protect consumers
from being over charged by business men. It also sets a minimum price to protect
producers from being cheated by business men.
 Price leadership. In the oligopoly market large firms set prices which small firms follow in
the industry.
 Resale price maintenance. This is where manufacturers fix prices at which retailers sell
consumers for example Newspapers.
 Auctioning. This is where the commodities are presented before potential buyers called
bidder who set the prices and the highest bidder takes the commodity.
 Commodity agreement or signing treaties. This involves countries setting prices at which
goods are to be supplied to each other in a specific period of time and no change in the
price until the period is over. It is common in international markets.

STANDARD OF LIVING AND COST OF LIVING.

18
 Standard of living refers to the quality of life a person or a group of people lives or expects to live
over time. Standard of living is the number of goods and services people consume over time.

Cost of living is the total money spent to maintain a particular standard of living, cost of living
determines standard of living. When the cost of living is high the standard of living is low and when
the cost of living is low the standard of living is high.

Factors determining the standard of living.

The following factors determine the standard of living;

 Price of goods and services in the market or cost of living or inflation. Where the prices are
high it leads to high cost of living or ir inflation and standard of living is poor and vice versa.
 Availability of goods and services. When goods are available there is high standard of living
compared to scarcity.
 Government policy. Taxation increases prices and reduces income leading to low standard of
living. Subsidization policy reduces prices which lead to high standard of living.
 General income of the people. When income of the people is high standard of living is also
high compared to low income
 Level of employment in the country. High level of employment leads to high standard of living
compared to low level of employment..
 Level of dependency. High level of dependency leads low standard of living and low level of
dependency leads to high standards of living.
 Availability and level of exploitation of the natural resources. When the natural resources are
available and well exploited, many goods and services are produced leading to high standard
of living and the vice versa.
 Political organization. A stable government encourages saving and investment there by raising
the level of employment and production in the economy hence high standard of living.

REVISION QUESTIONS.
1 a). Define the following terms as used in commerce;
i. Commerce. ii. Trade. iii. Aids to trade.
b). Explain any seven aids to trade.
2. a) Define scope of commerce.
b). draw a chart to describe the structure/ branches of commerce.
3. a. Outlines the importance of commerce in the development of a country.
b). why is commerce in secondary schools today in Uganda?
4. a) Define the following terms;
i). Production ii). Factors of production. Iii) utility.
b). Explain the factors of production and their rewards.
5. a). Distinguish between,
i). consumer goods and producer goods.
ii). Direct production and indirect production.

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iii). Industry and a firm
b). outline the functions of an entrepreneur,
6 a). Distinguish between specialization and division of labour.
b). Outline the advantages and disadvantages of specialization.
7a). Distinguish between primary production and secondary production
b) Explain the following types of specialization
i) Specialization by crafts ii).specialization by process/stage
iii). Specialization by area iv).specialization by commodity
8 a). Distinguish between location and localization of industries
b).Outline the factors which influence location of an industry
9 a).Define the term consumption as applied in commerce
b). Outline the factors an individual considers to buy a particular commodity
10 a).Define delocalization
b).Give reasons for delocalization of industries in your country
c).Outline the advantages and disadvantages of localization of industries
11 a).Define demand
b).Explain the factors that influence the quantity demanded on the market
12 a).Define supply
b).Explain factors that influence supply o a commodity in the market
13 a).Define the following terms
i).marketii).price
b).Explain the various methods in which prices are determined in your country
14 a).Distinguish between standards of living and costs of living
b).Explain factors which influence the level of standards of living in your country

CHAPTER TWO: TRADE

2.1. DEFINITION OF TRADE:

Trade means buying and selling of goods and services with an aim of making profits

 TYPES OF TRADE: There are two types of trade an these are;

20
 
Home trade: This is a trade within a country and its also referred to as local or internal
trade.
 Foreign trade: This trade between countries and its also referred to as international trade.
 TYPES OF HOME TRADE :There are two types of trade in home trade and these are retail trade
and wholesale trade

2.2. RETAIL TRADE:

This is the buying and selling of goods to the final consumer. A retailer is a person / trader who
buys goods and sells them to the consumer. Retailing is the selling of goods to the final consumer.

Functions of a retailer:
 He is the last link in the chain of production and therefore connects the producer and
wholesalers to the consumers.
 Stores goods until they needed by the consumers,
 Looks for market for the goods,
 Brings goods within the reach of the consumers.
 Offers advice to consumers on how to use the products bought.
 He displays a wide range of goods which enable customers to make choice.
 He breaks bulk. He buys goods in large quantities and sells them small quantities that
consumers can afford.
 Sometimes prepares goods for sale eg packaging, branding, etc..

Services of a retailer to the manufacturers/wholesalers:

 Finances the manufacturer/wholesaler by paying cash for the goods thus availing them with
working capital.
 He transports goods bought by him from the manufacturer/wholesaler to his premises.
 Keeps him informed of the market conditions and therefore enables him to make accurate
forecasts of future requirements ie. Carries out market research.
 Relieves the manufacturer/wholesaler the burden of storage.
 Helps the manufacturer/wholesaler to advertise the goods.
 Connects/links the manufacturer/wholesaler to the consumers,
 Saves the manufacturer/wholesaler to deal with small orders from consumers by breaking
the bulk.
Services of a retailer to the consumer.
a) He breaks the bulk. He buys in large quantities and sells in small quantities to consumers.
b) Sometimes transports goods to consumers’ premises or near them eg, Hawkers.
c) Stores goods until they are wanted by the consumers saving them from having large stocks at
once and also enabling constant supply of goods.
d) Advertises and displays a wide variety of goods to accord them opportunity to make choice.
e) He is a source of information to the consumers about the products, new fashions, and relative
prices.
f) Offers credit facilities to credit worthy/regular customers, enabling them to maintain their
standard of living.

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 g) Offers advice to consumers as regards quality, use and making right choice.
h) Stocks a variety of goods from different manufacturers thus providing the consumers with
variety and choice.
i) Sometimes offers after sales services to consumers regarding technical knowledge eg repairs.
j) Prepares goods for sale for example grading, prepackaging, branding etc. for the consumer to
buy them when they are ready and of good quality.

Qualities of a good retailer,

 Should be a good buyer. He must be able to buy economically that is know what to buy, how to
buy, where to buy from, how much to buy and when to buy.
 Should be pleasant or courteous in his dealings with customers.
 He should be able to forecast demand of the customers as regards quantity, quality, price,
packaging, etc.
 Should be a good administrator that is be able to control the flow of stock, other properties and
staff, should also audit his books regularly.
 He should be open and honest to the customers by not cheating through overcharging or under
weighing
 He should be cooperative to his suppliers and pay them promptly to ensure regular supplies and
earn cash discounts.
 He should observe cleanness of one self and place of work.
 Should practice good salesmanship eg able to convince customers to buy, advise them, give
appropriate discounts, aftersales services etc.
 Should possess relevant knowledge and experience in the trade he wants to carry out.
 Should pay his tax and other financial obligations in time.
Types of retailers in Uganda;
There are two types of retailers in Uganda. These are;

i. Small scale retailers

ii. Large scale retailers,
 Small scale retailers. These are retailers with the following features;
 Small capital base.
 They serve small market/ areas of few customers.
 They offer limited range /variety of goods or services.
 They are flexible. I.e. they can easily change position and type or form of business.
 They sell directly to consumers.
 They occupy very small area/space because of nature of stock held.
 They hold relatively small stock of goods.
 They have a small turn over and small profit margin.
 They operate on small scale and may not have fixed premises.
 Types of small scale retailers in Uganda

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 The following are small scale retailers in Uganda
 Itinerant traders: These are small scale retailers who move from place to place on
bicycle/on foot selling goods to the consumers. They include; hawkers, mobile traders,
peddlers, barrow boys etc.
 Hawkers: These are itinerant traders who move to distant places selling goods using a
means of transport.
 Peddlers: These are itinerant traders who move on foot with goods on their bodies selling
them to consumers. They usually concentrate in busy places like parks etc.
 Barrow boys: These are traders who move from place to place selling goods on
wheelbarrows to consumers.
 Single shops: These are small scale shops in fixed premises and usually owned by sole
trader and sell related range of goods.
 Tied shops: These are retail outlets that deal in items of one producer e.g. Petrol stations.
 Kiosks: These are single shops in fixed but temporally structures either wooden or metallic
containers usually set in busy places like parks, etc. they can be shifted from one place to
another.
 Canteens: These are single shops in fixed premises selling goods to specific group of
people/customers e.g. schools, hospitals, etc.
 Road side traders: These are traders who stage their stock alongside busy parts of the
road e.g. road junctions, bus or taxi stage etc.
 Urban stores: These are single shops set in urban areas specialized to serve particular
customers there e.g. garages.
 Village stores: These are single shops that usually sell goods to customers in villages.
 Market stalls: These are set in gazette market areas selling particular types of goods at
their stalls.
Characteristic of itinerant traders.
 They are travelling traders that is they move from one place to another selling their
merchandise.
 They do not have fixed premises.
 They bring the goods at the door steps of their customers.
 Their major means of transport is bicycle and motorcycles.
 They are dominant in small towns, trading centers and any densely populated residential
areas.
 They occasionally carry defective goods.
 Since their aim is not to build permanent clientele they usually take the advantage of the
ignorance of any simple customer they come across.
 They keep advertising their products by verbal means and use intensive persuasive
bargaining skills.(Hawkers, peddlers etc.) in Uganda.

 Reasons for increasing number of itinerant traders;

 Not many documents/formalities are required for the business to start.
 They do not much capital to start and run.
 Fixed costs like rent, electricity, water are avoided.

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  Some traders with fixed premises find it convenient to give their goods to be sold by
hawkers on commission basis. Traders enjoy this business because they can get
commission the more they sell.
 The existence of efficient transport network has increased their number.
 It is a source of employment.
 They are made use of by dormant parties like civil servants who want to make ends meet.
 There is ready market for what they sell since they sell what customers want eg. food etc.

 Advantages of small scale retailers:

(Reasons why most traders prefer small scale retail trade to large scale retail trade.)
 They can be conveniently be located anywhere eg. Villages, suburbs etc.
 Little capital is required to start up.
 There is personal contact between the proprietor and the customers.
 They are flexible in operation that is nature and location can easily be changed.
 Decision making is easy and faster since they are always owned by sole proprietors where
the owner has no body to consult.
 There is confidentiality/secrecy in business dealings and profits.
 Low and few operational costs are incurred e g. Rent, electricity, etc.
 Formation is easy because it requires few legal formalities.
 Administration/management is easy because of being small in size.
 Risks of loses are low since they are small. E g. In case of fire, theft, fall in demand etc.
 Dis advantages of small scale retailer.
(Reasons why traders may not prefer small scale retail trade but large scale retail trade.)
 Prices offered are usually higher than large scale stores.
 Limited scope of display and advertising.
 They employ small capital thus limited expansion of business.
 They have limited access to loans due to inadequate collateral security.
 They cannot enjoy economies of scale like large trade discounts.
 Turnover is low and cannot cope with modern trends hence low profits.
 Giving credit sometimes leads to bad debts.
 They can stock only a few varieties of goods because of limited storage and capital.
 Some sell defective, expired or poor quality goods.
 They have limited skills in business management.
 Their standard of hygiene is lower than in large stores.

 Problems faced small scale retailers in Uganda;

The following problems are faced by small scale retailers in Uganda;
 Inadequate business management skills eg poor record keeping.
 Lack of enough working capital due to inadequate security to access loans or credit.
 Lack of adequate market ;there is low demand to for products due to low incomes of the
people
 High tax rates which leads to reduction in their would be profits.
 High rate of inflation which makes pricing and planning difficult due .to price changes

24
  High prices of utilities like electricity, rent, water etc.
 Insecurity due to civil wars, robbers, theft, burglary etc.
 Unfair competition from other related traders.
 Poor transport and communication facilities especially in rural areas.

Large scale retailers;

These are retailers with large capital base and are able to buy their stock at large quantities in a
greater economy.

Features of large scale retailers:

 They operate on large capital base.

 They buy their stock in large quantities.
 They can afford to hire skilled personnel.
 They can afford to advertise their businesses.
 They hold large stock
 They either specialize or offer a variety of goods.
 Most of them are co-owned.
 They buy their stock mainly from manufacturers.
 They usually occupy large selling space.
 They mainly sell their goods on cash basis.
 Owners do not have direct contact with the customers.
 They operate in fixed premises.

Advantages of large scale retailers

 They hold a lot of stock and their volume of sale is big.

 They operate on large scale and employ a lot of capital hence able to spend on sales promotion.
 They buy stock in greater quantities hence able to enjoy trade discount.
 They operate from well-established fixed premises.
 They are able to use modern equipment for example computers to ease their operations.
 They offer goods at relatively cheaper prices since their cost per unit is low.
 They employ skilled labor or specialists hence efficiency.

Disadvantages of large scale retailers.

 They lack personal contact with customers and the employees. That is, customers, employees
and owners remain far from each other.
 They are not able to cater for the needs of the poor as they are normally located
in urban areas so the rural population may not access them.
 There are possible chances of pilferage it is hard exercise close watch on all
customers because of the big size ot the business.
 They experience high operational costs due to big size.

25
  Chances of mismanagement are high as the number of managerial levels
increase, which results into a greater gap between employees and
administration.
 They can be exposed to high risks caused mainly due to change in fashion, tastes
or accidents.
 Types of large scale retail units:
o Departmental stores. These are a number of single shops under one roof and ownership. Each
shop is a department under a departmental manager who determines what to sell and the price.
Hence decentralized purchase and selling.
 Features of departmental stores:
a. They are many shops in the same building that is one roof and one ownership.
b. Each shop deals in a different line of business. That is stocking one class of goods.
c. Each department carries out its purchasing, advertising, and book keeping. That is
decentralized purchasing.
d. They provide ancillary services like restaurants, banks etc.
e. They offer a wide variety of goods.
f. They are normally situated in the central shopping areas of the country.
 Advantages of departmental stores,
a. They provide a single shopping point to a customer.
b. One department can advertise for other departments.
c. They provide a wide variety for a consumer to choose from.
d. They provide large parking space for customers.

 Dis Advantages of departmental stores.

a) They are not well distributed in many parts of the country that is they are located in large
trading centers neglecting the rural areas.
b) The owners do not have personal touch with the customers.
c) It is expensive to start and run hence require large capital outlay to start and run.
o Multiple shops /chain stores.
These are a number of single shops under one ownership, selling the same class of goods but with
branches distributed in different parts of the country. They have the same shop frontal outlay,
and what to buy and their prices are determined at the head office. Hence have centralized
purchase and decentralized selling systems.
They are also called chain stores.
Characteristics of multiple shops
a) .They are many shops scattered in different towns and have same ownership.
b) They deal in very small range of related goods.
c) They have similar shop frontal appearance and display.
d) Prices are fixed by headquarters and are similar in all the shops.
e) All administrative matters are centrally taken at the head office.
f) Purchasing is centralized and selling is decentralized.
g) They deal strictly on cash basis.

26
 Advantages of multiple shops:
 Unsold goods in one shop can be transferred to another shop where they are demanded.
 Financial loss in one branch can be counter balanced by high profits earned from other shops.
 Goods are well displayed with price tags on them. This saves time since there is no bargaining.
 They bring goods nearer to customers since they are distributed to different towns in the
country.
 Shortage in one branch can be covered by transferring part of the stock from other branches.
 They have high turnover due to many branches.
 They enjoy large profits since they sell in large amounts.
 Disadvantages of multiple shops
 They require large capital to set up different branches
 They have fixed prices hence not allow bargaining
 The branches are scattered leading to difficults in management
 They do not offer discounts since prices are fixed.
 They are mainly located in urban areas neglecting the rural areas.
 They specialize in a particular range of goods hence do not provide a variety of goods to the
customers.
 They incur high overhead costs like rent, electricity, wages, etc.
o SUPERMARKETS:
These are single shops selling a variety of goods under self-service system. Goods are attractively
displayed in the shells with price tags on them. The buyer is required to move around the whole
shop to pick what he/she wants, which he/she puts in the basket/trolleys provided for this
purpose. The buyer then goes to the counter near the exit to pay to the cashier. A system known
as self-service.
 Characteristics of supermarkets:
a) They operate on a system of open display and self-service.
b) Stock a wide variety of goods
c) The goods are pre –packed and bare price tags.
d) Prices are fixed hence not negotiable that is no bargaining.
e) There is strictly no credit. All goods are sold on cash basis.
f) There are numerous exits at which payments are made and buyers are checked.
g) Trolleys and baskets are provided for shoppers to carry goods.
h) Sales psychology that is attractive display of goods that induces customers to buy.
 Advantages of supermarkets:
 They provide a variety of goods which makes choice of a buyer possible.
 They allow self-service which makes a buyer free to choose what is best for him/her and its
time saving.
 Prices are fixed hence no time is wasted in bargaining.
 They sell at relatively low prices because they buy in large quantities and are able to get
discounts.
 They have a wide market because of their location in urban areas.
 The goods are self-advertising due to attractive display.
 They can employ skilled labor hence efficiency.

27
  Services like trolleys, baskets for carrying goods are provided.
 There is no un due influence in supermarket by the seller because goods are got under self
service
 They sell on cash basis hence do not incur losses due to bad debts.
 Disadvantages of supermarkets:
 Prices are fixed hence no room for bargaining on credit.
 They require large capital to store goods in large quantities and in varieties
 They are only found in urban areas hence limited access to the rural areas/population
 They do not offer credit facilities to trust worthy customers who may not have ready cash.
 Some items can be stolen by un scrupulous customers i.e. shop lifting is common
 They concentrate in domestic items denying customers other goods.
 Since a few attendants are required ,employment opportunities are reduced
 At times expired goods may be sold
 They incur high expenses in form of tax, rent, electricity etc.
 They have fixed prices hence no bargaining
 A lot of time is taken moving from shelf to shelf looking for goods for the goods one wants
and comparing prices.
 There are serious losses in case of fire outbreak.
o Hyper markets. These are large super markets with large parking space ie. Car parks. They serve
multi shopping complexes and are usually bigger than super markets and provide varieties of
goods.
o Variety chain stores:
These are a number of shops dealing in a variety of goods under one ownership and distributed in
different parts of the country. They thus combine the features of departmental store and multiple
shops.
o Hire purchase firms: these are shops selling expensive items on hire purchase systems. The buyer
buys on credit but the commodity becomes his/her property after all installments are paid.in case
he/she fails to pay all installments, the commodity is repossessed by the seller and no refund of
the money paid is done.
o Automatic vending firms: they sell goods using machines operated by coins.an order is made and
coins equal to its value are placed in the machine and supply’s are made.it involves sell of items
like sweets, soft drinks etc.
 The advantages of automatic vending firms:
 Goods can be sold at any time of the day since it does not require a shop attendant
 Also buyers can access the goods any time even at night.
 Disadvantages of automatic vending firm.
 It is limited to customers with knowledge of operating the machine.
 It does not allow credit to those without immediate cash.
 It also requires electricity. Hence areas without power cannot have the service.
o Mail order firms/shops. These are shops where goods are sold through the post office using cash
on delivery (COD) service. They do not operate real shops but ware houses and base on extensive
advertising through sending catalogues to prospective customers send orders for goods they
need to buy through the post office.

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 Features of mail order firms;
 Transactions are effected through the post office.
 The business does not have shops
 The business depends on extensive advertising through magazine, newspapers. On line
advertising, and sending catalogues to reach their customers.
 They deal in durable and standardized goods that can be handled through the post office.
 There is no direct contact between a buyer and the seller.
 The business can be located anywhere provided it can access the post office.

 Advantages of mail order firms.

 It is most suitable for people who prefer privacy when purchasing goods.
 It eliminates costs associated with shop attendants since goods are only kept in store while
looking for market.
 Purchase decisions can be made from anywhere any time therefore convenient.
 They buy goods in large quantities therefore able to get discounts.
 They deliver goods at the customers’ premises which relieve customers of the transport charges.
 The catalogues widely spread by mail order firms present to customers with a wide variety of
goods to choose from.
 Disadvantages of mail order firms.
 They suffer high costs of advertising compared to ordinary shops.
 In countries where postal services are poor and undeveloped, mail order shops are unpopular.
 There is time wastage since post office formalities tend delay delivery of goods.
 There is no close contact between the buyers and the sellers
 Customers are not given chance to make their choice since they do not observe the goods but
only see pictures.
 The prices tend to be higher for the goods than on ordinary shops.
 It is suitable for mainly educated customers.
 It is not suitable for perishable urgently required goods because of much time required to deliver
the goods.
 It is limited to high value and bulky goods.
 Reasons why mail order shops are uncommon today.
 The ordinary customer in Uganda find it convenient to go to the ordinary shops to buy what they
want than the formalities at the post office.
 Improvement in transport makes it easy for buyers to reach trading centers.
 Extensive advertising tends to increase the cost leading to high prices for goods.
 Some consumers who need personal contact with the sellers find mail order shopping unfriendly.

 Factors to consider when setting a retail shop/business:

 Operational expenses in terms of rent, transport, power, labor/staff etc.
 Size of the market or demand conditions of the customers.
 Type of goods required by most people.
 The capital involved in setting up the retail shop, its source and availability.
 The availability of other retail shops handling similar products or competitors.

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 Source of supply of stock for instance near wholesalers or manufacturers.
 Government policy concerning the line of business in mind.
 Availability of infrastructure eg power, water, telephone etc.
 Terms of sale that is whether to extend credit or cash.
 Location In relation to what one wants to sell in the area.
 Experience of the retailer in the business he intends to follow.
 Shop lay out in terms of arrangement of counters and shop display.
 Possibility of future expansion.
 Storage facilities should be available for peak seasons.
o Situations in which large scale retailers out compete small scale retailers:
 Selling goods at reduced prices by offering discounts to their customers.
 Offering free gifts to their customers.
 By carrying out intensive advertising of their business.
 Offering free transport services to those who buy in large quantities.
 By use of loss leaders in their businesses.
 Selling their goods on credit to some of their customers.
 Use of special packaging materials which beautiful and attractive papers used for carrying goods.

Modern trends in retail business.

1. Credit selling. This is where goods and services are sold to customers but payment is made at a
later date.
Advantages of credit selling.
a) It attracts many customers to the business hence more sales.
b) Many goods are sold within a short time which clears room for other goods hence continuity of
business.
c) Goods sold on credit usually carry high prices which lead to increase in profits.
d) It enables sale of goods which would not sold on cash hence it eliminates wastage.
e) It is good for expensive items which require large sums of money on the buyer’s disposal.
Dis advantages of credit selling.
a. It requires many records kept for credit customers which to the cost of running the business.
b. It may lead to losses in form of bad debts when credit customers fail to pay.
c. Cash is tied in debts hence the seller may fail to meet cash business requirements.

Credit selling can be in a form of installment selling.

 Installment selling. This is a form of credit selling. It is a means of selling expensive goods and
payment is made in bits until all the cost value is completed. The buyer pays an initial cost or
down payment possesses the commodity and pays the balance in equal and defined periods until
whole amount is completed. The buyer may own the commodity immediately or until the last
installment is paid.
 Types of installment selling. There are two types of installment selling.
i). Hire purchase.
ii). Deferred payment.

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 Hire purchase. This is a method of installment selling where the commodity becomes property of
the buyer after the last installment is paid. In case the buyer fails to pay any installment the seller
repossesses the commodity and no refund is made for the amount so far paid.
 Deferred payment. This is a method of installment where after paying the first installment the
commodity becomes property of the buyer. In case of failure to pay all the installments the seller
only sues the buyer to recover the debt.
 Advantages of hire purchase to the seller;
i. It leads to increased turn over because credit selling attracts many customers who also buy more.
ii. The seller repossesses the commodity in case the buyer fails to pay the debt. Hence no loss.
iii. Goods sold under hire purchase carry higher price those sold for cash because of the additional
interest on the price hence he gets high profits.
iv. As customers frequently come to pay the installments they often pick interest in other items
hence commodities sold under hire purchase are self-advertising.
v. High turnover saves storage and insurance costs.
 Advantages of hire purchase to the consumers.
i. Payment is spread over a long period which is convenient for the consumer to buy expensive
item
ii. The item bought under hire purchase constitutes security for in cas a buyer wishes to get a
loan.
iii. The item bought can be used to generate income to pay the remaining installments for
example sewing machines, vehicles etc.
iv. The buyer enjoys comfort/use of the commodity as he pays for it. Hence improving standard
of living of the consumer.
 Dis advantages of hire purchase to the seller;
 The commodity repossessed may be in poor conditions that it may not be resold at a price equal
to the remaining installment.
 The seller’s capital is tied up in debts and may not be able to buy immediate cash requirements of
the business.
 The seller has to incur extra selling procedures and expenses such as record keeping and
employing credit managers.
 Some buyers may not be traced after taking the article on hire purchase leading bad debts.
 Dis advantages of hire purchase to the buyer;
 The buyer pays a higher price than the cash price. Hence is exploited.
 The consumer may be forced to buy more goods that he may not afford to pay or may not need.
Hence lives beyond his means.
 The buyer loses the commodity and the money so far paid in case he fails to pay any installment.
 The customer has to make a lot of trips to and from the seller’s premises which increases costs.

 Features to be included in hire purchase agreement.

 Nature and total value of the commodity both cash and hire purchase price.
 The deposit to be made at the time of possessing the commodity by the buyer.
 The amount of the periodic payments and the dates when each is payable.
 That the buyer will maintain the commodity in good conditions until full payment is affected.

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 That the buyer can terminate the contract if he paid 50% of the installments and has returned the
commodity to the seller.
 The buyer cannot change title of the commodity until last installment is paid.
 Name, address and signature of the hirer and the other parties in the agreement.
 The statement that the seller has a right to recover the commodity in case the buyer fails to pay
all installments.
2. Self-service. This system much as it is common with supermarkets, many large and small
businesses are adopting it. It involve the buyer moving around the shop where goods are
attractively displayed, picks the items to be bought carrying them in trollies or baskets and takes
them to the cashier at the counter to pay.
Advantages of self service.
 It is time saving. The customer picks what he wants very fast since the items are already
priced, packed and displayed.
 Low cost of operation because it does not require employing many shop attendants.
 Self-advertising because as goods are attractively displayed, customers may be attracted buy
other goods.
 No bargaining or haggling as prices are fixed.
 No undue influence from the attendants to persuade customers to buy what they not want.
 A variety of goods are stocked so that customers can do the shopping from place.
 Provides other services like trollies and baskets for carrying goods while shopping,
 Disadvantages of self service.
 There is no credit facility provided to customers. Hence the system is not good for without
ready cash.
 It does not allow customers bargaining since prices are fixed.
 It encourages shop lifting that is customers may pocket away some items as they serve
themselves.
 Customers may delay in the shops as they compare goods and their prices.
 It requires large shopping space.
 Sellers may not be able to advise buyers on quantity, quality, or choice.

3. Packaging. This is the process of wrapping/dressing in special packets or standardized containers

to make the ready for sale or marketing.
 Principle aims of packaging.
a. To protect the product from external materials like moisture, dust, germs etc.
b. To promote sales of the product by use of attractive packaging.
c. To standardize goods so as to make transport of goods to points of consumption easy.
d. To make handling the product easy and convenient.
e. To facilitate marketing of goods through mail order systems, self-service, and automatic vending.
f. To differentiate the product from other competing ones.
 Advantages of packaging.
 It attracts consumers’ attention and builds the desire to buy the product which increases sales.
 It enables the buyer to identify and choose the product easily.
 It enables easy handling of goods eg sugar, liquids etc.

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 It eliminates retailers’ work of weighing, wrapping, and pricing as pre packed goods are already
weighed and priced.
 It facilitates display of goods in the shop.
 It protects the goods against damage, destruction, contamination and other bad weather
conditions.
 Prepackaging adds value that is improves quality of the product hence high price for the goods.

 Disadvantages of packaging.
 It makes the product expensive because of the extra cost of packaging.
 It sometimes gives misleading impression as regards quality; quantity, size, etc of the product
inside the packet.
 It is not possible for someone to see or touch the product in the packet without it being altered or
opened.
 False information about the product may be put on the packages.
 Wrong items may be packed in the container or box.
 Sometimes poor quality goods may be packed in very beautiful wrappers encouraging people to
buy the at high price.
 Some packed goods do not show their expiry dates and this may encourage people to buy goods
that may have gone bad or expired,
4. Branding. This is the process of giving a name, symbol, trade mark of a combination of them to a
product so as to differentiate from related products of other producers.eg. For toilet soap; geisha.
Protex, imperial soap etc.
 Functions of branded goods.
 To distinguish related products of different producers.
 To promote sales of the firm through use of attractive brand names and trademarks.
 To identify products making marketing easy before customers.
 To protect the product and the company from other firms producing similar products by use
patent rights and copy rights.
 To advertise the product.
 Characteristics of branded goods.
 They are covered in containers or packets which can easily be recognized and managed.
 They are of uniform sizes, quality and weights.
 The packets or containers have distinctive appearance.
 Bear specific names or trademarks.
 Weights are clearly indicated.
 Name of manufacturer, date of manufacturing and expiry are clearly indicated.
 They must bear the national bureau of standard mark and stamp for quality assurance by the
government to the consumers.
 Advantages of branding to the retailer/seller.
 It promotes self-service. Consumers can serve themselves without any assistance of the salesman
leading to reduced operational costs.
 It speeds up service by eliminating weighing and wrapping of goods.
 Branded goods have fixed prices. This saves the seller time of talking to many customers about
prices.

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 Branded goods are self-advertising. Hence no need for a retailer to advertise.
 Retailer can get goods from the manufacturer if they are branded. Thus avoiding middle men’s
profits.
 Branded goods are easy to identify and easily displayed in retailer’s shop making selection easy.

 Advantages of branding to the consumer.

 Branded goods are standardized. Hence a consumer is assured of same size, volume and
quality.
 It saves consumers time which would be wasted in studying, comparing goods, and bargaining
before buying.
 Consumers can deal directly with the manufacturers.
 Shopping is made easy for the manufacturer sets his own retail outlet/shop.
 As branded goods advertise themselves, consumers are well informed about them.
 Branded goods are easy to handle and store since they are pre packed.
 Disadvantage of branded goods to the seller.
 Branding adds to the cost of operation making the final cost of a product high which discourages
the customers reducing sales.
 Retailers need to have a large stock of branded goods.
 The retailer needs to have a large variety of braded goods in order to satisfy the demands of the
customers.
 Disadvantage of branded goods to consumer.
 It can be misleading because poor quality goods may have an attractive name.
 Customers may become addicted to a particular brand ignoring others.
 It may lead to brand loyalty which leads to monopoly that can end up exploiting the consumer.
 Branded goods are highly priced because the cost of the good includes that of branding.
5. After sales services. This is a service offered to the buyer by the seller after selling
to him or her goods eg. Repairs, technical advice, offering guarantees, warrants, transport,
packaging etc. The cost of the service is included on the price of the commodity or the buyer may
be charged some money whenever his/her goods undergo such a service.
6. Automatic vending. This is the selling of goods using coin operated vending
machines. A person, who wants to buy the goods, inserts the order with the money
in the machine and is served the goods requested. The range of goods include;
sweets, cigarettes, stamps, cold drinks, toys, books
 Advantages of automatic vending.
a) The buyer does not need to wait for the attendant in order to be served. Thence he or she can
be served even when the ordinary shops are closed that is can be accessed at any time of the
day.
b) It is fast since it does not involve bargaining and there is self-service hence it saves time.
c) There is no cheating with this method.
d) There are no credit sales. Hence no bad debts.
e) It is more accurate than use of salesmen.
f) There is no need for sales attendants reducing the sales expenses.

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 Disadvantages of automatic vending.
a) It only people with power and it close when power goes off. Hence it cannot be
operated in areas where there is no electricity.
b) It requires people with the skills to operate the machines only hence not suitable
for illiterates.
c) It may cause loss especially where fake coins are used.
d) It is limited to urban areas. Hence rural population lacks this service.
e) It does not sell large commodities like cars etc.
7. Blending: this is the act of adding value to improve on the existing quality of the commodity. For
example flavor or other additives as with tea blending.
8. Auctioning. This is a method of selling where a commodity/ goods are presented before a
number of people (bidders) to set the prices (bid) such that the highest bidder takes the
commodity. The seller however sets a reserve price bellow which the commodity cannot be taken
by the highest bidder. Auctioning is common in churches, fundraisings, court of law, police, when
selling items.
A reserve price is the price set by the buyer in an auction market below which the
buyer cannot take the commodity.
9. Price reduction. This is selling the product at slightly low prices to attract and retain customers.
10. Resale price maintenance. This is a situation where manufacturers of branded goods fix and
emphasize the retail prices of their goods.eg newspapers, soft drinks.
11. Bar cording. This where marks and serial numbers are indicated on goods for the sake of follow
up.
12. Tender. A tender is an agreement/contract to supply a particular commodity or a number of
them to a particular institution for a particular period of time at the end of which it stops or
renewed.
13. Good will. This is the loyalty/good name or reputation that an ongoing business has acquired
over time hence more sales and profits.it differentiates an old business from a new one. Good will
may be a result of good business location, name and reputable trade mark etc.
14. Customer request. These are provisions by retailers to allow customers request for goods or
services lacking in the business. A note book is placed in one of the corners or counter for
customers to write in products they wish to include stock.
2.3. Wholesale trade.

Whole sale trade is the buying of goods from a manufacturer in large quantities and selling the to
other traders or retailers in slightly small quantities.

A wholesaler is a person who buys goods in large quantities from a manufacturer and selling them in
relatively small quantities to other traders.

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 Features /characteristics of wholesale trade
 It involves large purchase of goods from producers.
 It involves large capital base.
 The source of supplies/goods is producers/manufacturers.
 It involves large ware houses/store for storing the good.
 It involves advertising of goods of the brand/ products held by him.
 It involves transportation of goods from producers to his ware house.
 It involves selling of goods in large quantities to others
 CHAIN OF DISTRIBUTION

These are the channels through which goods are moved from the manufacturers to the consumers
and these are

 Short channel:
This is where goods are moved from manufacturers to consumers directly. It is also called
direct channel

Producer to consumer

 Medium channel
This is where goods are moved from the manufacturer to retailers who then sell them to
consumers.
Manufacturer to retailers to consumers
 Long channel
This involves the movement of goods from the manufacturers to wholesaler’s, to the retailers
and then to the consumers.
producers to wholesalers to retailers to consumers
 Manufacturer to agent to retailers and then to consumers:
Here the goods are distributed from the producers through his agents retailers and then sold
to the consumers.
 Manufacturer to agent and then to consumer
Here the goods are sold to consumers through his appointed agents.
CHAIN OF DISTRIBUTION

MANUFACTURERS

WHOLESALERS
AGENTS
36
 RETAILERS
PRODUCER’S RETAIL OUTLET

consumers

 Factors to consider in choosing a channel of distribution

 Nature of goods: in case of perishable goods like milk, meat, vegetables e.t.c. some may be
sold directly and others will better be handled by agents with specialized transport and
storage facilities.
 Size and number of producing firms: the smaller the size and number of producing firms, the
centralized the methods of distribution. And when there are many producers, they are unable
to carry out their whole selling, and retailing hence decentralized channel of distribution.
 Availability and cost of transport for goods: when transport is readily available a direct
channel is used.
 Government policy and administrative procedures: sometimes the government may force the
marketing of certain commodities to be handled by a certain channel of distribution.
 Marketing risks: some producers prefer to sell their products through intermediaries to avoid
risks for example changes in fashion, market demand, falling value or reduction in weight
e.t.c.
 Marketing costs: some goods require special marketing facilities like refrigerators, storage
e.t.c like tea, tobacco, vegetables, fruits, while others require sufficient technical and selling
ability.
 Functions of a wholesaler;
 Provides a link between the producers and retailers.
 Breaks bulk by buying in large quantities from producers and selling in small quantities to
retailers.
 Stores goods safely until demanded.
 Keeps manufacturers and retailer supplied with working capital by paying promptly and
offering credit facilities to the retailers.ie finances manufacturers and retailers
 Prepares goods for sale e.g by sorting, branding, blending, assembling, etc.
 Transports goods from the producers to their warehouses and sometimes to the retailers’
premises.

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  Undertakes advertising of goods held by him in his brand name.
 He does market research and gets useful information about the market for goods bought
from manufacturers.
 Services of a wholesaler

To the manufacturers;

 Buys goods in bulk thus clears the production line saving him certain risks eg. Fall in demand,
fall in price etc.
 Wholesalers own large warehouses which help s manufacturers eliminate the need for having
large ware houses.
 Finances the manufacturers by paying promptly which provides them with working capital.
 Wholesalers help manufacturers to market their products by advertising he stock held by
them.
 Wholesalers provide transport for small scale producers like farmers. This relives them of
transport costs.
 Wholesalers prepare goods for resale. e.g. branding, in their own names which saves he
manufacturers from additional costs.
 They undertake market research , thus enabling manufacturers assess demand their products.

To the retailers;

 He often extends credit facilities enabling them to operate on a very small capital.
 Sells goods in quantities which a retailer can afford to buy i.e breaks bulk.
 Prepares goods for resale by grading, prepackaging, branding, pricing e.t.c which reduces
retailer’s work load and enables him/her serve customers faster.
 Provides a retailer with a variety of goods from many manufacturers and enables choice.
 Some wholesalers deliver goods to the retailers hence saving them from transport costs.
 Advises retailers on a range of goods to be held , prices to be charged, services to be offered
etc.
 Wholesalers are conveniently located which assures the retailers of immediate delivery.
Services of a wholesaler to the consumers
 He offers a variety of goods from different manufacturers to retailers who sell them to
consumers.
 He stores goods and releases them on demand hence ensuring constant supply of goods and
stability of prices.
 Advises retailers who also assist consumers on similar advices.
 Prepares goods for sale which assist consumers who buy them.
 Types of wholesalers:

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 Wholesalers are classified according to:
a. According to range of goods dealt in: hence,
i. General wholesalers. These are wholesalers who deal in a variety of goods from various
manufacturers.
ii. Specialized wholesalers; these are wholesalers who concentrates/ deal in specific type of
goods or a class of them.
b. According to geographical area covered. i.e
iii. Regional wholesalers. These are wholesalers who operate in particular regions of the
country only eg. Eastern region of Uganda.
iv. Nationwide wholesalers. These are wholesalers who operate throughout the whole country
and have branches in different parts of the country.
c. According to method of operation,
v. Cash and carry wholesalers. These are wholesalers who sell their goods on cash basis and
usually offer them at reduced prices.
vi. Rack jobbers. These specialize in marketing particular types of goods to other specialized
wholesalers or retailers.
vii. Mobile/ truck wholesalers. /wagon jobbers. These combine buying, selling , and delivery of
goods in one operation.
 Elimination of a wholesaler.

Circumstances when a wholesaler can be by-passed in the chain of distribution.

 Where manufacturers open their own retail outlets to serve consumers directly.eg. Bata shoe
shops.
 In case of large scale consumers who buy directly from producers eg industries, schools etc
 Where production is on small scale and the items are sold directly to consumers.ie local
demand.
 Where the producers deal in perishable and fragile goods they sell directly to consumers to
eliminate losses due to spoilage and damage.
 In case of mail order business where goods are sold through the post office.
 In case of technical goods which require after sales service from the manufacturers.
 Where the manufacturer has his own appointed agents or depots in different parts of the
country eg. News papers,
 Where goods are bulky, expensive and slow selling eg furniture etc
 Where the market is small and localized.
 In case of large scale retailers who find it economical to buy directly from manufacturers.
 Where retailers combine and buy as one ie concentration of many retailers in one place.
 In case of direct services which do not require a wholesaler.
 In case consumers combine and buy as one for example consumer co-operatives.

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  Factors determining the number of wholesalers in a particular trade:
i. The financial position of the manufacturer in a certain industry.
ii. Standardization, packaging and branding of goods by the produce.
iii. Where the manufacturer can produce a variety of goods in their own line and establish their
own retail outlets.
iv. The state of transport and communication facilities in the country.
v. The scale of operation of retailers in a particular field of trade i.e. small, or large scale
retailers.
 Arguments in favor of direct selling of goods by a manufacturer to consumers.
 He/she would control the distribution for the goods up to the final stage hence reducing the
risks of product adulteration and counterfeits.
 He would keep demand for his/her products high by offering it at a lower competitive price.
 He would avoid having his product competing alongside other products in the retail shops.
 He would have direct touch with the final users hence knowing their suggestions and
complaints.
 He is able to demonstrate the use or working of his products to the final users.
 He is able to transfer the profit margin enjoyed by the wholesalers and retailers to himself
hence making the business more profitable.
 He would be able to get rid of the middlemen with their dishonest trade practices like
hoarding of products, over charging etc.
 Middlemen in home trade

Middle men are traders and agents who link producers to consumer. They lie in between the
producers and consumers.

Middlemen in home trade are of the following types

i. Merchants
ii. Agents.

Merchants: these are traders who hold business in their own names and contribute the capital for
the business. They include wholesalers and retailers.

Agents: These are middle men who hold or may not hold the goods on behalf of a trader and sell
them or only connect the traders to buyers for the sale of such goods. They are of the following
types;

i. Brokers. These connect sellers to buyers but do not hold goods.

40
ii. Commission agents. These are middle men sell goods in their possession on behalf of their
principal for a commission in another country. The commission is a percentage of value of the
goods sold. Goods unsold are taken back to the trader at the traders’ expenses.
iii. Factors. These are middle men who possess and sell goods of their principals for a
commission called factorage.
iv. Del-cre dere commission agent. This is a middle man who in addition to holding the goods on
behalf of the trader, guarantees sale of all goods and collection of debts due from the sales.
He /she earns an extra commission for this guarantee.
v. Auctioneer. This act on behalf of their principal to sell goods by public auction where the
highest bidder becomes the buyer.
 Advantages of middle men in the chain of distribution.
 They add extrinsic qualities to the products like, wrapping or packaging.
 They save the manufacturer a number of risks eg fall in demand,
 They bring goods near to the consumer.
 They finance producers by paying cash.
 They advertise and market the goods by blending and branding.
 They sell goods to consumers in affordable quantities.
 Disadvantages of middle men.
 They overcharge consumers so as to maximize profits.
 They create artificial shortage of some goods by hoarding, them so as to overcharge buyers
 They adulterate commodities e.g adding water in milk.
 Some sell defective goods, expired and poor quality goods.
 Problems faced by traders in home trade.
 Limited market due to poverty of the people.
 Inadequate capital for both initial investment and expansion.
 Poor transport and communication facilities especially poor roads in the rural areas.
 lack of business skills and training by traders .eg stock control, book keeping
 High costs of operation eg high costs of transport, rent and taxation
 Price instabilities /inflation which affects planning eg pricing
 Insecurity in some parts of the country due to theft, burglary, riots and civil wars.
 Corruption and bureaucracy especially with government departments when securing
documents
 Stiff competition from high quality imported goods and cheaply damped goods in the country.
 Possible Solutions to the problems:
 Need for thorough market research and extensive advertising.
 Starting up business colleges to train people business skills.
 Boosting infrastructure in the country for example roads, communication, power etc
 Sensitizing population on risk control and management eg role of insurance.
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  Encouraging formation of business associations to convey their complaints to the government
eg uma.
 Government giving subsidies like tax holidays or exemptions to new firms.
 Government to ensure peace and stability in the disturbed areas.
 Government to enforce anti-corruption laws and reduce on the red tape bureaucracy when
securing documents.

 DOCCUMENTS USED IN HOME TRADE;

Home trade involves a number of documents at each stage of every transaction.
Transaction: A transaction is any dealing between two or more people involving a transfer of
goods or offering a service for a consideration usually money. It can be cash or credit
transaction.
Cash transaction:
This is where a commodity is transferred and immediate payment of cash is made by the
buyer to the seller.
 Cash sales/transactions. This is where goods or services are sold and payment for them is
immediate.
 Advantages
- It reduces the expenses involved in keeping records of customers.
- It reduces the risks of losses through bad debts.
- It provides ready cash to meet the business cash requirements e.g. buying new stock.
- It enables the trader to pay the creditors in time and obtain the cash discount which adds to the
business profits.
- It saves time and other legal expenses which would be wasted in legal formalities involved in case
of debtors’ failure to pay their debts.

Credit transaction: This where payment for the commodity bought/sold is at a later date after
the transfer of the commodity by the seller to the buyer.

A transaction to be completed there are a number of steps and at each stage there is a
document. The documents at each stage are;
Step 1. Birth of an idea. An idea to buy develops from an advertisement. Advertising creates
a buyers inclination towards buying a commodity advertised by the seller. This can be from
news papers, radios, posters, announcements etc.
Step 2; letter of inquiry; this is a letter by the buyer to seller inquiring more about the goods
offered for sale e.g the prices, the quality, quantity, terms of sale, delivery etc.
step 3: Reply to an inquiry; this is a letter written by seller to the buyer giving details of goods
offered for sale as asked by the intending/ prospective buyer. The reply can be in
any of the following forms;

42
 i. Price list; this is a list of items offered for sale and their corresponding prices.
ii. Catalogue. This is a booklet issued by the seller to the prospective buyer giving
details about goods offered for sale, their prices, and other details like colour,
quality, terms of sale, etc.
iii. Quotation: this gives some detailed information about goods offered for sale eg
prices, terms of sale, e.g. C.O.D, C.W.O, discounts offered, etc. It is issued where
no regular price lists or catalogues are used.
iv. Samples. These are goods given to prospective buyer freely and to taste before
purchase is made.
v. Price current. This shows the prices in force for the goods at a particular time and
is subject to changes.
vi. Proforma invoice. This can be issued with the other documents above. It is an
invoice which does not debit the buyer but demands payment before goods are
delivered to the buyer. Hence it is issued where the buyer does not accept credit.
It is also sometimes issued with samples sent to the intending buyer and when
they are accepted it become an ordinary invoice.

Step 4. An order. This is a request by the buyer for supply of goods from the supplier. It indicates the
description of goods , quantity, prices as per quotations or price list, dates and mode of delivery. It
can in form of a letter or an already printed form

Sample of an order:

To be delivered in two days from date of order by your delivery van to our premises at kakiri book shop .

MULINDWA&CO.RETAILER
DEALERSINSTATIONERIES
P.O. BOX 720 KAKIRI
17- 06- 2016
THE SALES MANAGER ORDER NO. 4078
KARIBU GENERAL SUPPLIES
P.BOX. 891
KAMPALA
DEAR SIR,
Re. AN ORDER
Please supply us with the following items;
Sn Item Quantity Perunit price (shs) Amount(sh
)
1 Chalk 50 boxes 2,000 100,000=
2 Pens; blue 30 pkts 15,000 450,000=
red 20 pkts 15,000 300,000=
3. calculators casio 10 pcs 10,000 100,000=
Total 950,000

43
 Yours faithfully,
Mulindwa Bule charles
Manager/purchasing officer
Step 5 Offer on credit or not;

When the supplier has received an order, he/ she may have to consider whether to offer credit or not
to buyer. If no credit is to be offered, the following terms are quoted;

i. C.O.D. (Cash on delivery). It means that cash is paid when the seller delivers goods to the
buyer’s premises .It is common with goods sold through the post office (mail order
business).
ii. C.W.O. (Cash with order). It means that the buyer sends cash together with the order for
the goods to the supplier/seller.

Spot cash. This means that the buyer pays cash as he/she receives the goods at the seller’s premises
To encourage spot or prompt payment, the seller gives price reductions (cash discounts) to the buyers.
Discounts:
A discount is a reduction on the price of goods to encourage customer to buy in large quantities or paying in
the required period/cash payments/promptly. It is common practice to express it as a percentage of the value
of the commodity. The discounts are therefore;
i. Trade discount. This is a reduction on the price of a commodity by the seller to encourage
people to buy in large quantities ie Bulk purchases. It can also therefore be referred to as
quantity discount. Trade discount serves the following functions.
- It is a form of sales promotion to encourage large quantity purchases.
- It can act as a profit margin to retailers for goods whose prices at which they are to sell to
consumers are fixed by the manufacturers eg News papers, soft drinks, magazines etc Under
resale price maintenance.
- Trade discount is also used by retailers to adjust a price list to avoid frequent change in the price
lists or quotations.ie has a fixed price list or quotation.
A buyer therefore gets trade discount after the purchase of a commodity.

Calculation involving trade discount;

Alexander traders bought goods of shs. 800,000 and got a trade discount of 12%. How much did he pay?
100−T . D
Working; Final price = Original price X
100
100−12
= 800,000 X
100
88
= 800,000 X
100
= Shs. 704,000.
Cash discount. This is a reduction on the price of a commodity by the seller to encourage prompt
payment. It is called prompt payment when payment is done in the required period or credit period.
The seller can give both trade and cash discount to the customers who may choose to take both or
only the trade discount.

44
Example;
Mulondo bought goods of shs. 700,000 and a trade discount of 10% and cash discount of 2%. How
much did he pay?
100−T . D 100−C . D
Final price = Original price X X
100 100
100−10 100−2
= 700,000 X X
100 100
90 98
= 700,000 X X
100 100
= Shs. 617,400
Where the final price is given e.g of the above example;
Mulondo paid shs 617, 400 after a trade discount of 10% and a cash discount of 2% . what was the
original price?
100 100
Original price = Final price X X
100−T . D 100−C . D
100 100
= 617,400 X X
100−10 100−2
100 100
= 617,400 X X
90 98
= shs. 700,000
Mugalya paid for a suit shs. 90,000 after a trade discount of 10%. How much was the discount?
Discount = original price - final price
100
But ; Original price = final price X
100−T . D
100
= 90,000 X
100−10
100
= 90,000 X
90
= shs. 100,000
Hence . Discount = 100,000 - 90,000
= shs 10,000
STEP 6. Credit status inquiry. In case the seller accepts to offer credit to prospective customer,
he/she has to establish his /her credit worthiness before credit is extended to avoid risk of loss due
bad debts. The credit worthiness of a new customer is established by use a credit status inquiry.

A credit status inquiry is a letter written by the seller to establish the credit worthiness of the
intending customer before credit facility can be extended to him or her. The letter is written to either
or all of the following parties;

i. Banker to the customer. This is to establish his/ her financial stand of the customer with the
bank and how he/she has been paying his/her debts got from them.
ii. Other clients to the seller who know the new customer and his/her credit worthiness.
iii. Other suppliers who have ever dealt with the customer an know his/her credit worthiness.

45
 iv. Trade association in which the new is a member e.g. UMA, National chamber of commerce.

Step. 7. Dispatch/Advice note. It is a document written by the seller to the buyer informing him/her
that goods are ready and should expect their delivery any time. It advises the buyer to organize
storage and staff to receive the goods.

Step 8. Packaging and the Package sheet. A package sheet is a document prepared by the seller and
is packed to show items wrapped in each box/ container sent to the buyer. Each container has its
package sheet.

Step 9. Delivery note. It is a document written by the seller to accompany the goods and to evidence
goods delivered and accepted by the buyer. It is signed by the transporter /seller and the buyer and a
copy is sent back to the seller as another remains with the buyer.

Step . 10. Invoice. It is a document written by the seller and sent to the buyer to evidence goods sold
to him/her on credit. It companies the goods and the delivery note. It is used to demand payment for
the value sold.

i.
Contents of an invoice;
ii.
Name and address of the seller
iii.
Name and address of the buyer
iv.
Invoice number
v.
Order number
vi.
Delivery note number
vii.
Description of the goods
viii.
Date of sales
ix.
Any discount issued ie trade and cash discounts
x.
Unit price, quantity, and total amount
xi.
Credit period
xii.
Net value due
xiii.
Any terms of sale/payment e.g interest to over due account/debt
xiv. E &OE. Ie. Errors and Omissions excepted. This means that the seller reserves the right
to correct any error or omissions found in the invoice. It is a legal term which must be
included on any document demanding or acknowledging payment.
 Procedure on receipt of the invoice:
 Verify it with the copy of the order placed to ensure that what is invoiced is what was
ordered.
 Verify it with the package sheet, delivery note, or goods received note to ensure that goods
invoiced are those received.
 Check on the prices and trade discounts allowed to ensure that no overcharge has been made
and that the due discount has been allowed.

46
  Check the calculation and arithmetic accuracy of the invoice ie the multiplications, calculation
of trade discounts, percentages etc
 If correct then a cheque/payment is prepared and when incorrect the seller is informed
accordingly.
STEP 11. Goods received note: this is a document prepared acknowledge goods received by the
buyer. It shows a list of goods received by the buyer.
Step 12. Discrepancies in an invoice; any or error made in an invoice can lead to an over or
undercharge to the buyer. These errors are therefore reported to the seller by the buyer for
correction. This can be issuing a debit note or a credit note.
i. Debit note; it is a document prepared by the seller to the buyer to correct an under charge
in the invoice. It informs the buyer that his / her account has been debited therefore
demands for more payment of the value on its face.
ii. Credit note. It is a document prepared by the seller to the buyer to correct an undercharge
in the invoice. It informs the buyer that his/her account is credited by the amount on it
face therefore he/she has to pay less by that value.
A credit note is also prepared to evidence goods returned by the buyer to the seller.

Step 13. Goods returned note. This is prepared by the buyer and sent to evidence the goods taken
back or returned to the seller. Goods are sent back to the seller for several reasons like not being of
the order, being excess supplies, spoilt, damaged, expired, low quality etc. for the goods returned a
credit not is issued by the seller to the buyer.

Step 14. Statement of account. This is a document which shows all the transactions of the buyer
with the seller for a particular period usually a month. It is part of the ledger page/ an account of the
customer with the seller. It shows; unpaid balance of the customer for the previous month, invoices
issued, and remittances made/receipts issued, credit notes issued, debit notes issued, and net
balance due at the end of the month. It is a polite demand for the balance unpaid.

NB. All values which increase the balance/value demanded eg invoices, debit notes are debited, while
those which reduce it are credited eg the receipts, and debit notes.

Sample of a statement of account:

KARIBU GENERAL SUPPLIERS

P.O. BOX 897
KAMPALA DATE 31 – 6 – 2016
TO;
MULINDWA & CO RETAILERS
DEALER IN STATIONERIES
P.O.BOX 829.
KAKIRI RE. STATEMENT OF ACCOUNT
DATE. PARTICULARS DABIT (SHS) CREDIT (SHS) BALANCE

47
 (SHS)
1- 6 – 2016 Balance b/d 100,000=
4- 6 – 2016 Invoice no 300 100,000 200,000
10 – 6 -2016 Receipt no 200 150,000 50,000
15- 6 – 2016 Invoice no 410 400,000 450,000
17- 6- 2016 Debit note no.003 50,000 500,000
18– 6 – 2016 Invoice No. 500 300,000 800,000
25- 6 – 2016 Credit note no. 006 40,000 760,000
30– 6 – 2016 Receipt no. 280 600,000 160,000
E&OE: All accounts balances are due on demand. By : David Mbuga :
ACCOUNTANT
Step 15; Receipt; this is issued after payment is made. A receipt is a document issued by the seller to
acknowledge receipt of cash from the customer. A receipt marks the end of a transaction. Where
cheques are issued no receipt may be issued since a cheque is a receipt in itself.

i. Uses of business documents in business transaction.

ii. Initiates and facilitates transaction eg letter of inquiry, quotation etc. ie opens way for a
transaction.
iii. Provides proof for and evidence of sale or purchase of goods and services.
iv. Provides information for preparation of financial statements/ book keeping eg cash sale
receipt.
v. Discrepancies/errors in a
vi. transaction can be traced/detected eg invoices, delivery note etc
vii. Correcting errors e.g credit note, debit note etc
viii. Provides record for reference of a transaction.
ix. Signifies ownership of goods eg bill of lading.
x. Provides information for decision making eg credit status inquiry.
xi. Provides evidence for payment of goods or services eg receipt, cheque.
xii. Shows accountability and procedure/ systematic follow up of a transaction ie for audit
purposes.
xiii. A basis of borrowing funds from financial institutions eg proforma invoice.
xiv. They are useful for tax assessment eg sales invoice.
xv. They are used as a tool for control of stock eg stock card, delivery note
xvi. Enable traders to keep truck of customers/ suppliers.
2.5. S ize and growth of businesses
Local businesses are no longer contented with the size of their establishments. There is a tendency to
expand their concerns to whatever limit they can manage. The reason is that large scale operations
result into high revenue, reduction in costs, and better rate on capital invested. Hence Economies scale.
Economies of scale.
These are the reductions in costs resulting from large scale operations of businesses. The economies of scale
may be attributed to the following causes. Ie advantages of large scale businesses:
i. Better use of modern equipment. Large scale firms have large capital which enables them
to buy most modern equipment leading to cheaper and fast rate of production.

48
 ii. Economy of administration. Administration expenses do not always increase in direct
proportion to increase in production. Hence increase in production reduction in overall
costs of production.
iii. Specialization. Large firms can employ greater number of employees each of which is
given only a small portion of the job leading to specialization and its advantages.
iv. Advertising. Large scale firms can easily afford to spend large sums of money on
advertising leading to large markets, sales and revenue.
v. Research. large firms can afford to invest in research a useful service for improvement in
markets.
vi. Staff welfare. Large firms can offer facilities and opportunities to its workers. This
stimulates them and result in better production.
vii. Economies of buying. Large firms buy their raw materials or stocks in large quantities and
are able to get them more cheaply. Some own their own sources of raw materials eg tea
companies.
viii. They can afford to borrow from financial institution in case they run out of funds because
they have the collateral security.
ix. They can offer wide range of goods for customers’ choice.
 Disadvantages of large scale firms/businesses.
i. They spend large sums of money on advertising, large sales force, and offer handsome
discounts. Hence expensive to run.
ii. A change in fashion or taste can bring about heavy losses.
iii. There is lack of personal touch. Employees and owners remain very far from each other.
iv. Management becomes difficult with large firms as they tend to expand further with
increase in departmentalization

A small firm.
i. Many business units in Uganda still operate on small scale despite the trend towards
expansion. The Reason for continuous existence of small firms are:
ii. Lack of capital. New business owners usually have only small amount of capital to start with.
iii. Size of market. Most businesses are small because of small size of the market.
iv. Lack of contact. Many operate small businesses because they wish to have direct contact and
control over their businesses also start to benefit directly from their talents and efforts.
v. Personal services. Most small businesses can easily maintain personal contact with their
customers especially firms offering personal services eg law firms, audit and accounts firms.
vi. Simplicity in management. Small firms are easy to manage because there are not many
consultations. Direct contact with employees even makes management simpler.
vii. Limited liability. With the introduction of limited liability private companies, business men feel
secure to have small concerns of their own with only a few members a pat from the sole
proprietors.
 Forms of business expansion.

49
A business can expand in one of the following ways:

i. Natural growth.
ii.Amalgamation
i. Natural growth: This involves a firm growing because of its policy of not withdrawing all
its profits but ploughing it back into the business. Businesses can also expand by entering
into partnerships, or joint stock companies instead of being run individually.
ii. Amalgamation or combination: This is where two or more firms join to form one large
firm.
Forms of combination/amalgamation:
i. Complete amalgamation or consolidation. This involves dissolution of all companies
intending to join creating a new company to take over the business with a different name.
the old shareholders are given shares in the new company
ii. Absorption or merger. This involves one company taking over the business of another
company or companies. The company taking over retains its original name while others
lose their entities to the one taking over ie absorbing them. The shareholders of the firms
taken over will be issued with shares in the firm which has taken over.
iii. Holding company. In this case various companies entering the combination retain their
entities while one of them acquires the controlling shares in the others of at least 51% or
more in them. This is called the holding company while the others are subsidiary
companies.
iv. Cartel. This is not a form of combination in the real sense of the word but a relationship in
which various companies agree to sell their products through central selling agency and
only member companies can sell through this agency. Hence they become monopoly and
influence the price at which they sell their products.
 Lines of combination.
Firms may combine in any of the following directions:
i. Horizontal combination. This is where two or more firms combining operate in the same field
and engage in businesses at the same level for example processing firm combining with other
processing firms.
ii. Vertical combination. This is where two or more firms operating in similar field but at
different levels of business / production combine . for example when tea farmer and tea
whole sale firm combine to form a business unit.
iii. Conglomerate. This is where two or more firms producing related commodities but do not
compete with each other e.g. bullets and guns.
 Reasons for merging of firms.
i. To maximize managerial economies e.g. using same manager for several firms and maximize
use of skills.

50
ii. Maximizing marketing economies e.g. Selling related products in one place using the same
facilities and advertising.
iii. Increasing level of production.
iv. Increasing bargaining power with other firms.
v. Avoiding unnecessary competition and duplication among merging firms.
vi. Avoiding taxes by having several firms under one ownership.
vii. Creating market for raw materials produced e.g. a bakery for wheat flour.
 Disadvantages of mergers.
i. Over expansion may lead to diseconomies of scale eg. Highly qualified expensive
management may be employed, lack of market due to over production, etc.
ii. Decision making is likely to be very slow because of bureaucracy.
iii. Owners of the firm fear to lose independency.
iv. Loss of contact with customers.
v. Creation of monopolies.
vi. Cost of production may be high when prices of raw materials used by firms are higher.
vii. Some workers may become unemployed when they are not absorbed in the new
establishment.
viii. Merging may be difficult when firms have different objectives.

2.6. INTERNATIONAL TRADE (FOREIGN TRADE)

DEFINITION:
International trade is the buying and selling of goods and services between two or more countries. It
involves; export, import and entre-port trade.

Export trade: this is the selling of goods and services to other countries. The goods sold to other
countries are called Exports. The person who sells the goods to other countries is an Exporter.

Import trade: this is the purchase/buying of goods and services from other countries. The goods
bought from another country are called imports. The person who buys goods from another country is
called an importer.

Entre-port trade. It is the buying of goods from another country for re-export.

Bi-lateral trade. This is the buying and selling of goods and services between two countries only. It
involves trade between one country with another country. For example Uganda with Kenya only.

Multi-lateral trade. This is trade among many countries. for example trade among Uganda, Tanzania,
Kenya, Burundi, Rwanda , etc.

51
Visible trade. This is trade in tangible items I e goods only. It involves visible exports and visible
imports.eg vehicles, food stuffs, clothes, etc.

Invisible trade. This is exchange of intangible items / services . It involves export and import of
services like; tourism, banking, insurance, medical care, etc.

Examples of invisible exports of Uganda are; foreign tourists in the country, Ugandans working in
other countries etc. Uganda’s invisible imports include; foreign banks, foreign insurance companies,
expatriates etc.

Balance of trade (BOT). This is the difference between values of visible exports and visible imports of
a country.

Favourable balance of trade. This is when values of visible exports are more than the visible imports
of a country.

Unfavourable balance of trade. This a situation when the visible imports are more than the visible
exports of a country.

TERMS OF TRADE(TOT). This is the relationship between the prices of exports and the prices of
imports of a country. Ie it the number of imports per unit of exports.

export prices
Terms of trade =
import prices

Favourable terms of trade. This is a situation where the export prices are more than the import
prices. This implies that each unit of exports purchases many units of imports.

Unfavourable terms of trade. This is a situation where the import prices are more than the export
prices . it implies that to buy one unit of an import it requires many units of exports.

Balance of payment(BOP). This the difference between total receipts from exports ie both visible and
invisible exports and payments on both visible and invisible imports of a country.

Balance of payment on current account. This the difference between total receipts and total
payment on only trade items of goods and services across the border countries.

Balance of payment on capital account. This is the difference between receipts on loans and
investments of a country in other countries and payment on loans and investments of the other
countries with in the country.

Overall balance of payment. This is the difference between total receipts and payment on both
current and capital accounts.

52
Favorable balance of payment (surplus BOP). This is a situation where the total receipts of a country
from exports are more than the total payments on imports.

Unfavorable Balance of payment(Deficit BOP). This is a situation when the total payments on
imports are more than the total receipt from the exports of a country.

Reason for deficit BOP

- Increased import spending

- Reduction in capital in flow
- Increase in capital out flow
- Reduction in export earnings
 Reasons for international trade(why international trade/causes of international trade)

Just as no individual is self-sufficient in all that he or she wants, no country can produce all that her
people require. The following are the causes of international trade:

i. Differences in geographical conditions eg climate. This makes countries produce different

commodities which call for exchange.
ii. Differences in availability in natural resources/ natural endowments e.g soils, minerals,
water bodies etc. this calls for international interdependence.
iii. Differences in industrial development. Some goods are un economical to produce in some
countries but can efficiently be produced in other countries.
iv. Differences in level of technology or skills. Developed countries have advanced technology
than the developing countries.
v. To achieve and maintain good international relationship with other countries.
vi. Specialization. If a country specializes in the production of one commodity it lacks others.
vii. Vent for surplus. Excess goods produced by a country can only be disposed off through
selling
 Advantages of international trade (benefits of international trade).
- Countries can get what they cannot produce at home.
- It helps countries to obtain a variety of goods and services from other many countries.
- It offers an avenue for sell of surplus goods and raw materials that would otherwise be
unutilized.
- During times of calamities eg floods, wars, draught etc, a country is able to get supplies
from other countries through international trade.
- It promotes healthy competition between local and international producers which
leads to production of high quality and charging low prices to the final buyers.
- It promotes transfer of technology, skills and ideas amongst countries.
- It is a source of government revenue through taxation.

53
 - It is a source of foreign exchange.
- It encourages international specialization which leads to production of goods in large
quantities and reduced prices. Hence improving peoples’ standard of living.
- It involves movement of people from one country to another leading to international
understanding.
 Disadvantages of international trade.
- Too much specialization often leads to problems. If a country relies heavily on one
export commodity, in case of failure or fall in demand or price fluctuations, it may
cause severe hardship to the country.
- It may lead to over exploitation and depletion of resources eg minerals
- Goods imported from more developed countries often pose a threat to the local infant
industries which are always out competed by them.
- Some goods imported may have adverse effects on the lives of the citizens for example
detective and romantic literature to the youth. Et.c
- Some goods imported are harmful to the lives of the people for example harmful
drugs, expired foods etc.
- If a country depends on a particular country for the supply of a commodity of strategic
nature it may sometimes have to tolerate some undesirable gestures from such a
country.
- It may lead to imported inflation if a country imports goods from an inflation prone
country.
- It may lead to dumping. This means selling of goods to another country at a lower
price than local price.
- It exposes the citizens of a country to expensive and superior commodities. This
affects the savings and capital accumulation.
 Restrictions in international trade/Trade protectionism
To reduce on adverse effects of international trade countries put restrictions on international
trade and measures to control the movement of goods and services between countries.
 Reasons for restriction of international trade:
i. To protect her infant domestic industries against competition with foreign produced
goods.
ii. To improve on her balance of payment position when the exports revenue increase
and payments on imports reduce.
iii. To encourage domestic industrial investment and production when local markets for
domestic goods improve
iv. To create more employment opportunities when domestic industries grow.
v. To discourage dumping of goods from other countries.

54
 vi. To have a self-sustaining economy and avoid hardship during times of
misunderstanding i.e. reduce dependency.
vii. To discourage importation of dangerous goods like military materials, drugs,
pornographic materials etc.
viii. To raise government revenue in form of taxes imposed on imports.
ix. To strengthen international political and economic ties for example in preferential
trade area.
x. For strategic reasons. For example to maintain national security.
xi. To reduce imported inflation.
 Tools/ methods of restriction /protectionism
i. Total ban: this is putting an embargo to prohibit importation of certain goods in the
country.
ii. Quota. This involves putting a limit or a certain maximum amount of goods to be imported
in the country.
iii. Tariff or customs duty. These are taxes imposed on imported goods to make them
expensive
iv. Foreign exchange control. Foreign exchange may be released for the purchase of specific
goods and not others.
v. Subsidization of local producers ie government financing local producers or reduction in
taxation so as to make cost of production low compared to foreign produced goods.
vi. Devaluation. This is a deliberate policy by the government to reduce the value of the local
currency cheaper so as increase exports and reduce imports because foreign currency is
expensive.
vii. License control. A limit is put on issuing licenses and given to importers and exporters
after fulfilling laid down conditions.
viii. Sanitary and health regulations or policy. Several health policies or legal formalities are
put up to be fulfilled for example several forms to be filled by importer or exporter of
goods. This may discourage them to import or export.
ix. Import substitution. This involves encouraging setting up industries to produce goods
previously imported.

 FACTORS LIMITING INTERNATIONAL TRADE

(i) Great physical distance separating countries making transport and communication difficult
and costly.
(ii) Language differences which leads to need for interpreters.
(iii) Differences in currencies leading to need for foreign exchange.
(iv) Differences in political ideologies or political differences limiting the transfer of goods
from one country to another.

55
 (v) Similar levels of economic development. Hence countries produce similar goods and
services limiting exchange.
(vi) Terms of trade. i.e. price differences between the goods and services in different
countries.
(vii) Low market size and limited purchasing power hence few goods are traded in.
(viii) Differences in culture, customs, values and religions limit exportation or importation of
goods in particular countries e.g pork to Muslim countries.
(ix) Economic policies like protectionism such as quotas, tariffs etc. limit the amount of goods
imported and exported.
(x) Technological innovations whereby new products are being produced to replace the old at
a very fast rate as the old ones become obsolete.
(xi) International trade requires too much capital.
(xii) Differences in weights and measures. This calls need for conversion of units which is
difficult.
 Characteristics/features of foreign trade.
 It includes a number of expenses/costs like shipping costs, insurance, import duties.
 A lot of formalities must be completed before trade is allowed eg. Import license, permission
to remit money abroad etc.
 It involves purchase of goods in large quantities.
 Trade is through Agents not directly between importers and exporters.
 It involves use of foreign currencies to buy foreign goods.
 There are many restrictions in international trade to reduce the level of imports and exports.
 It involves wide markets.
 It involves traders from different countries.
 Differences between home trade and international trade:
- Home trade involves traders in the same country while international trade involves traders
or governments of different countries ie across countries’ boundaries.
- Home trade involves using a country’s domestic currency while international trade involves
use of foreign currency.
- Traders in home trade are of the same country while in foreign trade they are from different
countries.
- Home trade involves wholesalers and retailers while foreign trade involves Export and
Import trade.
- Few documents are involved in home trade while foreign trade requires many documents.
- In home trade, Excise duty is paid, while in foreign trade the tax paid is customs duty
- Local languages are used in home trade while in international trade foreign languages are
used.

56
 - Special packages may not be required for goods in home trade while in foreign trade special
packaging is required.
- Advertising in home trade is simple and requires use of local media while in international
trade it requires use of international media.
- Insurance in home trade may not be taken for goods but in international trade it is a must to
insure goods against several risks.
- There are few restrictions in home trade but many in international trade.
- Goods in home trade are mainly stored in manufacturers’ or wholesalers’ warehouse while in
international trade they are stored in bonded warehouse..
- In home trade road and railway transport are used while in foreign trade they are mainly
water and air transport.
- In home trade traders offer after sales services. Which are not there in foreign trade.

 Efforts made by government to promote trade with neighbouring countries.

- Establishing specialized institutions to provide investment and marketing of a
country’s products. Eg the Uganda investment authority, export promotion board,
UmA etc
- Creation of an enabling atmosphere through peace, stability and rule of law in the
country.
- Participation in annual trade fairs both within and outside the country to expose her
products to external markets.
- Establishing and expanding of productive infrastructure like roads, power generation ,
communication facilities, etc
- Liberalization of the economy there by attracting private sector investment and its
participation both internally and externally.
- Putting in place a sound, stable economic atmosphere for example low inflation, tax holidays,
export incentives etc.
- Joining regional economic groupings/ blocks with her neighbours eg preferential trade
area, COMESA ,etc to ease movement of people.
- Promoting export of many nontraditional exports.
- Exchange of trade delegates with partner / friendly trading countries.
 Improving exports :
A country can improve her exports by providing incentives to business men as:
i. Export compensation. This entitles an exporter to claim a percentage of the value of the
exports from the government. This makes him/ her able to charge less for the goods to
the importers hence goods become more attractive to them.

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 ii. Customs draw back. This requires that a manufacturer who imports raw materials and
pays customs duty is refunded such duty when he/she re-exports the finished products.
The refund made is the customs draw back.
iii. Government Agencies. These are agencies set by the government to assist exporters e.g
finding markets, arranging exhibitions, providing useful information and education to local
business men, credit guarantees, negotiations for preferential treatment.etc.
 Intermediaries in international trade

These include;

i. Import merchants. These are trader who buy goods from abroad in their own names and
sell them locally. Their profits consist of the difference between the cost and selling prices
of imports. They resemble wholesalers in home trade.
ii. Import commission agents. These are people who import at overseas sellers risks and are
paid commission. They are sent consignments by overseas sellers and use their best
knowledge of the local market conditions to dispose the consignment at the best prices.
They deduct the commission from the sales/proceeds and remit the difference. They do
not take risk of the unsold goods and return them at the exporter’s expenses.
iii. Import brokers. These are people who do not buy or sell goods themselves but arrange
deals between buyers and sellers. They have expert knowledge of technical details and
offer their services to importers for a brokerage. This is commission calculated as a
percentage of the cost of the cost of goods bought through them.

 Channels of export trade:

The main channels are:

i. Selling from the country without the seller himself going abroad.
ii. Selling by overseas Agents. This involves sending goods to agents in overseas countries
who sell them at local prices and remit the proceeds less the expenses and commission.
An agent who guarantees collection of debts from clients and if they fail to pay he under
takes to pay the debts due by himself is a del credere agent. He/she gets an extra
commission called del credere commission.
iii. Selling from an overseas office. This is where manufacturers have established their own
office in the overseas countries which collect orders.
 Terms of sale in international trade.

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 These are conditions to be considered in the selling of the goods and services. They are included
in quotations and other purchase documents to show the expenses involved in the price quoted and
who is to meet them ie whether by the importer or the exporter. They include:

i. Ex-works or LOCO. The price quoted includes only the cost of goods as they leave the
factory or works and all the other expenses are to be born by the importer. It is the
cheapest price quoted.
ii. F.O.R. it stands for free on rail. It includes charges for carriage up to the nearest
railway station from the seller’s factory but not freight charges.
iii. D.D. it stands for Delivered docks. It includes the cost of carriage to the docks.. Docks
are places where ships wait for loading and off loading.
iv. F.A.S. it stands for free alongside ship. It includes carriage charges to the Docks, Dock
handling expenses and dock dues but not the loading expenses.
v. F.O.B. it stands for free on board. It includes all expenses to the dock, handling charges
and loading expenses.
vi. C & f. it stands for cost and freight. It means that the price quoted includes the costs in
F.O.B and the freight charges or shipping charges.
vii. C.I.F. it stands for cost, insurance and freight. The price includes all expenses from
carriage to the docks, freight charges and insurance premiums..
viii. Loaded. It includes all costs to the port of destination and unloading expenses.
ix. In bond. It also all costs of carriage up to the bonded ware house and handling charges
there.
x. Duty paid. In addition to handling goods in bond it includes payment of any customs
duty.
xi. Franco. It stands for free of all costs. It includes all charges up to and delivery of goods
to the importers premises.
 Documents used in international trade.

They include :

I. Inquiry. This is similar to one of the home trade. It involves an intending importer
requesting for information regarding goods offered for sale from the import agent.
II. Reply to an inquiry. This is usually a catalogue or an international quotation. Provided by
the exporters’ agent to give detail about goods offered for sale.
III. An Indent. An indent is a request by the importer to his agent in a foreign country to place
an order for goods with a specified supplier or one of his choice.
Open indent. This is an indent in which the supplier is not mentioned/named. The agent
looks for the best supplier with the best terms and contacts the importer for approval.

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 Closed indent. This is an indent in which the supplier is named . therefore
the agent places an order with the supplier named.
IV. Bill of lading. This is the most important of all export documents. It is a document
containing details of goods loaded on the ship, terms and conditions under which they
have been accepted by the shipper and the shipping charges. When signed by the captain
of the ship, it becomes evidence of receipt for goods by the shipper.
It has the following functions.:
a. It is a receipt for the goods by the shipper.
b. It is a contract of carriage.
c. It is a document of title to the goods shipped. Ie. A person named in it can claim for
the goods.
V. Certificate of origin. It is issued to show the country from which goods are imported. It is
prepared by the seller and signed by the local chamber of commerce and issued to the
buyer/importer who presents it with the invoice to the customs officials for accurate
calculation of customs duty. It is of great importance with such countries that have
entered mutual agreement to charge less or no customs duties on goods imported from
one another.
VI. Proforma invoice. It is like an ordinary invoice except that it does not debit the buyer. It
may be sent to the buyer when payment is expected before delivery of goods to enable
the buyer obtain the necessary permission from the central bank or carry out necessary
customs formalities before the goods reach the port.
It has the following functions ie it serves as
a. It is served when the buyer is expected to pay for the goods before they are
dispatched or sent to his premises.
b. When orders of the buyer are small.
c. When the seller is not certain of the final prices.
d. If samples have been sent with quotation so that when accepted it becomes an
ordinary invoice.
e. If it is to be used like quotation to answer an inquiry.
VII. Freight note/shipping note. This is drawn by the shipping company and indicates charges
for shipping the goods. It is forwarded to the exporter who pays the amount and gets a
receipt. It is then forwarded to the importer with the invoice and bill of lading. In case of
FOB goods, it is forwarded to the importer un receipted who is required to pay the
shipping company before he gets delivery of the goods.
VIII. Letter of credit. This is a means by which an importer obtains credit and the exporter gets
assurance of payment of the amounts due to him. After the importer has requested to be
supplied with the goods, the exporter requires that he opens a letter of credit with a
reputable bank with in the exporters’ country. The importer then goes to his bank in his

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 country that issues a letter of credit to the corresponding bank in the exporters country
which now guarantees that goods shall be paid for and supplies are made.
A letter of credit can be revocable or irrevocable.
Revocable letter of credit. This one which can be withdrawn or its term altered by the
importer without prior consent of the exporter.
An irrevocable letter of credit. This is one which cannot be modified in any way or
withdrawn by the importer without permission of the exporter.
 Letter of hypothecation. This a letter from an exporter to his bank authorizing it to sell goods
being exported for the best price it can get if the bank cannot obtain payment on a bill of
exchange drawn on the importer and is already discounted for the exporter. The exporter
undertakes to make up any deficit between the amount of the discounted bill and the
proceeds of the sale less expenses.
 Consular invoice. This is an invoice that has been seen and signed by the consulate or
embassy of the country to which the goods are being exported. This makes the consul to
ensure that goods are reasonably priced and no undesirable goods enter their country. A
small fee is paid by the exporter for getting the invoice signed.
 Bill of exchange. This is an unconditional order in writing instructing the one to whom it is
addressed to pay the person named on the face or his order the amount stated in it on
demand or at a stated future date.
 Certificate of inspection. This is prepared to show that goods imported have been checked
and found free from contamination or they are of the desirable quality therefore suitable to
enter the country especially food stuffs, drugs etc
 Insurance certificate. This shows that insurance has been taken with an insurance company to
cover the goods against possible risks involved.
 Weight note. This states the weight of the goods delivered at the dock.
 Calling forward note. This informs the exporter when the goods should be ready at the dock
for loading..
 Dock warrant. it is a document of title for the goods kept in the warehouse at the dock for a
long period.
 Commodity market:

It ideally refers to market for goods and services. However it particularly refers to the highly
specialized market where raw materials are sold and bought at international level. E.g. at
Mombasa, London, for coffee and Tea from East Africa. Dealing in this market is either for spot or
future sale.

Spot sales. These are deals for such commodities which are ready to be delivered as soon as the deal
is made.

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Future sale. These are deals which require delivery of commodity at a future date at a price agreed
on at the time of the deal.

 Economic integration.

Economic integration consists of countries that have agreed to accord preferential treatment on
goods imported or exported to each other. Eg the East African community(EAC).

The integration can be at the following levels:

i. Preferential trade area(P.T.A). This is where countries agree to charge less customs duty on
goods imported from member countries and high taxes to non member countries
ii. Free trade area. This is where countries eliminate all taxes from member countries but
charging different tariffs on goods from nonmember countries.
iii. Customs union. It is where countries eliminate all taxes among themselves but adopting a
common tax and quota system to nonmember countries.
iv. Common market :This is a more advanced and complex level of integration. it provides an un
restricted market for domestically produced goods and services, has common policy on tariffs
and quotas, and provides free mobility of factors of production especially labour, capital and
entrepreneurship. This calls for member countries to provide a political, legal, economic and
social fame work to allow the flow to take place.
v. Economic union/community: Here there is elimination of all tariffs on goods from member
countries, and charging a common tax structure to non member countries. There is free
mobility of factors of production, harmonious economic policies, joint ownership of social
infrastructure like roads, railways, ports, telecommunication etc. and use of common currency
among the member countries.
vi. Monetary union. This involves the adaptation of a single currency and monetary standard in
the entire region. this may require the establishment of a single central bank to issue the
currency, administer and control the monetary policies to benefit the member countries.
vii. Complete economic integration. This is a stage of economic integration where member
countries surrender all their national sovereignty on economic, social and financial and all
other related areas.
 Merits of economic integration.
 Trade creation. This is a shift of trade from high cost non member countries to low cost
member countries. This results into efficient utilisation of resources due to specialization.
 It promotes specialization and it s benefits. Eg mass production It encourages health
competition . This leads to better quality output by the different countries.
 It increases bargaining power. Unified strength and policies on the international market can
easily be adopted the when it is the case with one country.

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 Widening of markets leading to large scale production and reduction in costs per unit of
output.
 Expensive projects can easily be jointly under taken by the member countries.
 It results into income distribution through labour and other factors of production mobility.
 Demerits of economic integration.
 It may lead to trade diversion. Trade diverts from high cost member countries to low cost non
member countries.
 Members may end up consuming low quality goods from the member countries instead of the
high quality ones from the non member countries.
 Loss of revenue. Countries whose main source of revenue is customs duty, lose such revenue.
 Loss of sovereignty. It interferes with the political and economic policies of the country.
 It is expensive to establish eg administration, common transport and communication facilities.
 Problems faced by traders in international trade.
 International trade is very a complicated field because it follows a number legal formalities
that must be met for each transaction.
 Finding customers or suppliers in another country is not easy.
 It is not easy to obtain credit supplies.
 There are many possibilities of fraud/theft for example high way robbery , sea pirates etc.
 There are high risks of getting substandard , expired or low quality goods from other
countries.
 Fluctuations in exchange rates and other commodity prices affect traders especially in
planning .

Questions for review

1. a. What is retail trade?

b. State three differences between multiple shops and departmental stores.
c. Explain why most traders prefer small scale retailing to large scale retailing
2. a. Define the following types of retailers;

i. Single shops, ii. Tied shops. iii. Itinerant trades.

b . Outline the problems faced by small scale retailers in Uganda.

3. a. Describe any five types of small scale retail traders in your country.
b. Outline the qualities of a good retailer.
4. a. What are the functions of a retailer in home trade?
b. Outline the factors to be considered when setting up a retail shop/business.

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 5. a. Mention any five types of large scale retailers in Uganda.
b. Explain the functions of large scale retailers to;
i. Producers ii. Consumers.
6. a. Give the advantages of each of the following retail services:
i. self service ii. Hire purchase

b. What are the disadvantages of hire purchase?

7. a. What is branding?
b. Mention five characteristics of branded goods.
c. State the advantages of branded goods to;
i. Retailers. ii. Consumers iii. Manufacturers.
8. a. Outline the functions of branded goods.
b. How does branding differ from packaging?
c. Mention any five principle aims packaging.
9. a. Outline the advantages of large scale retail out lets.
b. What are the features of the following retail out lets?
i. Departmental stores
ii. Multiple shops
iii. Super markets.
iv. Hawkers
10. a. Differentiate between hire purchase and deferred payment.
b. Give any six contents of a hire purchase agreement.
c. What are the advantages and disadvantages of hire purchase to ;
i. the consumer ii. the seller/producer ?
11. a. Explain the advantages and disadvantages of large scale retail businesses
b . How do large scale retailers out compete small scale retailers?
12. a. Explain the features of small scale retailing.
b. What are the characteristics of itinerant traders?
c. Give eight reasons why the number hawkers is on the increase in Uganda?
13. a. what are the main features of large scale retailers?
b. under what circumstances can a retailer be by-passed in trade?

14.a . Define wholesale trade.

b. Explain the features of wholesale trade.

c. under what circumstances may the services of a wholesaler be eliminated

15 a. Explain the functions of a wholesaler in the chain of distribution

b. What would a manufacturer gain from selling his goods directly to the consumers?

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 c. What are the services of a wholesaler to;
i. the retailer ii. Manufacturer. iii. Consumers
16 . a. Differentiate between a broker and a factor.
b. Outline the functions of middlemen in trade.
c. what are the disadvantages of middle men?
17. (a). Distinguish between natural growth and amalgamation of firms/businesses.
(b) Explain the various ways in which firms may combine.
18 (a). Explain the advantages large scale firms.
(b). Explain why small why small firms continue to exist despite the advantages of large
scale large scale firms.

19. ( a). Explain the Various lines in which firms merge.

(b). Outline reasons for merging of firms.

(c). What are the disadvantages of mergers.
20.a. Distinguish between the following terms:
i. Balance of trade and balance of payment
ii. Terms of trade and terms of sale.
iii. Export trade and import trade.
b. Explain why your country should trade with other countries.

21 a. Outline the benefits your country gets when trading with other countries.

b. Explain the disadvantages of international trade to your country.

22. a. Distinguish between.

i. Visible trade and invisible trade.

ii. Favourable balance of trade and un favourable balance of trade.
b. i. Explain why a country should restrict international trade
ii. Explain the methods used by your country to control international trade.

23 a. Describe the importance of the following documents in international trade:

i. An indent. Ii. Letter of credit iii. Letter of hypothecation iv. Consular invoice.
b. Outline the features of foreign trade.
c. How is international trade different from home trade?

24 a. Outline the limitations of international trade.

b. What methods is your country using to improve her trade relations with the neighbour
countries?

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 c. What problems do traders in international trade face?

25(a). Distinguish between natural growth and amalgamation of firms/businesses.

(b) Explain the various ways in which firms may combine.

26(a). Explain the advantages large scale firms.

(b). Explain why small why small firms continue to exist despite the advantages of large scale
large scale firms.

27. ( a). Explain the Various lines in which firms merge.

(b). Outline reasons for merging of firms.

(c). What are the disadvantages of mergers.

Chapter. 3 BUSINESS UNITS:

3.1 Definition .
Business units are the various ways in which businesses are owned and managed. Businesses may be
owned and managed, singly, as partnership, joint stock companies, co-operatives, or by government.

Businesses owned and managed by individuals either singly or as a group in form off partnership,
registered as joint stock companies or co-operatives, constitute the private sector. Those
owned/started and managed by government are state or public enterprises and constitute the
public sector.

Private sector enterprises are;

i. Sole proprietorship/ sole trade

ii. Partnerships
iii. Joint stock companies/ registered companies.
 Private limited companies and
 Public limited companies
iv. Co-operatives.
v. Marketing boards.
Public sector enterprises are.
i. Parastatal organizations

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 ii. Corporations
iii. Local authorities.

3.2 : Sole trade/sole proprietorship.

This is a business owned and managed by one person called a sole proprietor or sole trader. A sole
trader contributes all the capital, bears all the risks and losses and in case of profits he takes all of
them alone. Sole trader/sole proprietor is the trader who runs a business alone and the business run
by one person is sole trade/proprietorship.

Features of sole proprietorship/ trade.

 Ownership is by one person called a sole trader.

 Share of profits and losses. A sole trader takes up all the profits and bears all he risks and
losses of the business.
 Management. The sole trader manages the business alone or may be assisted by other family
members.
 Liability. Liability of the owner is unlimited.
 Legal entity. There is no separate legal entity between the owner and the business. The
business and the owner are the same before the law.
 Decision making. All decisions are made by the sole trader himself without consulting
anybody.
 Starting. There are no legal formalities required for a sole trader to follow before the business
is to start.
 Capital contribution. All the capital is contributed by the sole trader himself.

 Advantages/ Merits of a sole trader.

 Easy to start since it does not require any legal formalities to start like registration.
 Little capital required to start and operate.
 The owner enjoys all the profits alone.
 The owner has personal contact with the customers. Thus can offer credit to trust worth ones.
 Enjoys business confidentiality and is not exposed to the public eg. Operations and profits.
 There is personal initiative which increases efficiency.
 Few risks are involved since it is small.
 It is flexible ie. Changes business with ease.
 There is independent quick decision making in business since there no one to consult.
 There is independence of the business owner ie one’s own boss hence accountable to himself.
 Provides employment to family members and himself.

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  It can be conveniently located in both rural and urban areas.

 Disadvantages/Demerits of sole proprietorship.

 Limited capital hence limited expansion of the business due to lack of security for loans.
 Small scale operation hence no economies of scale.
 Unlimited liability of the owner/sole trader.
 The sole trader over works hence tiresome since he /she does all the work alone.
 Absence of the sole trader affects the business.
 Lack of specialization and limited experience in business by the owner.
 The business has limited market.
 Poor decisions may be made since there is no one to consult.
 The owner bears all the risks and losses alone.
 There is lack of continuity due to death of the owner. Hence business depends on the life of
the owner.
 It does not have a separate legal entity ie not recognized legally as being separate from the
owner.
 Problems faced by sole traders in Uganda.
a) Control and organization are done by one person which over burdens the owner.
b) Limited capital because they have inadequate security for loans.
c) Limited entrepreneurship and managerial skills.
d) Limited market due low demand because of general poverty of the public.
e) High competition from other formal businesses.
f) High taxes which reduce the would be profits.
g) Poor decision making results into losses
h) Bears the burden of business risks liabilities and losses alone.
i) Uncertainties leading to lack of continuity.
j) It is not a separate legal entity ie. Not recognized legally.

3.3. Partnership Business.

Partnership is the relationship which subsists between two or more persons carrying on a business
with a view of making profits. Professional firms prefer this kind of business.

 Characteristics of partnership businesses.

 Membership. Membership is between a minimum of 2 and a maximum of 20 members with
ordinary partnerships and 2 to 50 members with Professional firms.
 Formation. Formation is by mutual or contractual agreement among the members.

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  Management. All members are involved in the management of the partnership business/firm
with ordinary partnerships.
 Each partner is an agent of the firm. One is bound by the activities of each other.
 Liability. Each partner has unlimited liability except for the limited partnership.
 Transfer of capital. There is no transfer of capital without the consent of all the other
partners.
 Decision making. Major decisions are made by majority or all partners.
 Share of profits and losses. Profits and losses are shared in agreed proportions of the
partnership agreement. In case of absence of the deed, they are shared equally.
 Registration. The association / partnership must register with the registrar of business names.
This assists to give identity. i.e. show the owners of the business.
 Types of partnerships.
1. Ordinary partnership.
This is where all members in the partnership have unlimited liability. This means that in case
the business fails to pay its debts, the partners can be called upon to pay after selling personal
property.
2. Limited partnership. It is where members in the partnership have limited liability except at
least one partner whose liability is unlimited.
3. Temporary partnership. It partnership formed to fulfill a specified objective or to last for a
specified period at the expiry of which it must dissolve. These are also called joint ventures.
4. Permanent partnership. This is partnership whose time to end is not specified and not known
at the time of formation.
5. Syndicate. It is partnership formed for financial purposes.

 Types of partners.
They are categorized and called according to the following
 According to capital contribution
i. Real partner. This is a partner who contributes capital in the formation of partnership
and may or may not participate in the day today running of the business.
ii. Quasi partner. This is a partner by name. He allows his or her name to be used as a
partner but does not contribute to the capital. He does not take part in the day to day
running of the business not liable to the debts of the firm but gets part of the profits
for using his name. Quasi partners are people with high reputation or profession
whose names usually create good will to the business.
 According to liability
iii. General partner. This is a partner with unlimited liability and may be called upon to
meet the debts of the firm from personal resources if the firm fails to settle them.

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 iv. Limited partner. This is a partner whose liability towards the firm’s debts incurred by
the firm is limited to a stated sum of money usually his capital contributed. Should the
business fail to pay its debts, a limited partner would not be required to contribute
beyond the capital contributed by him in the partnership. The limited partnership act
provides the following conditions for limited partners ,
a. They must be registered as limited partners with the registrar of companies.
b. They are not allowed to take an active part in the day to day running of the
business, to act on behalf of the firm or to enter into contract that binds the firm.
 According to participation;
v. Dormant partner/sleeping partner. This a partner who contributes capital , shares the
profits and losses and is equally responsible to the debts of the firm but does not take
part in the day to day running of the business. Dormant partners are usually people
with busy schedules elsewhere e.g. civil servants but wish to have their money
involved in partnership business.
vi. Active partner. This is a partner who in addition to the contribution of the capital and
share of profits and losses he/she takes part in the day to Day running of the business.
 According to age;
vii. Major partner. This is a partner who has attained the age of 18 years and above.
viii. Minor partner. This is a partner with an age bellow 18 years.
ix. Partner by Estoppels. This is not a partner in the real sense but is always around the
business so that the public recognizes him to be a partner. He pretends to be a
partner.
 Formation of partnership business.

Partnership is formed by members agreeing mutually or writing an agreement called a partnership

deed.

 Partnership deed/Agreement;

It is a document / a written contract stating terms and conditions under which the partnership
business is to be conducted by the partners.

 Contents of the partnership deed.

i. The name, address and location of the firm.
ii. Name, address and occupation of each partner.
iii. Status and type of each partner e.g. active, dormant, general partner etc.
iv. The amount of capital to be contributed by each partner.
v. The ratio in which profits and losses would be shared by the partners.
vi. Rights of each partner e.g. drawings allowable, salaries if any, interest to be allowed
on capital e.t.c.

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 vii. Duties allocated to each partner.
viii. The method of calculating good will at the time of retirement, death, or admission of a
new partner.
ix. The manner in which books of accounts of the firm would be kept or prepared.
x. Procedure to be adopted at the time of dissolution of the partnership.
xi. Duration of the partnership business if temporary.
xii. The purpose for which the partnership is formed ie nature or objective.
 Partnership Act 1890/1932
In the absence of a partnership deed, table A of the partnership act will be used to control
partners. This has the following provisions;
 Profits and losses are to be shared equally among all the partners.
 No interest is to be paid on capital contributed by partners.
 No interest is to be charged on drawings by the partners.
 5% interest is to be charged on loans given by a partner to the partnership.
 Every partner has a right to take part in the conduct of the business in the partnership.
 In case of any difference arising in business, decisions are taken by the majority of the
partners
 Every partner has a right to inspect the books of accounts.
 No salary to be given to any partner for being active in the partnership

 Rights and duties of partners.

a) Every partner has a right to act on the behalf of the business. Ie. Can sign documents, enter
contracts on behalf of all the partners except quasi partner.
b) Every partner is liable to the debts incurred by the firm except the minor and the quasi
partner
c) No new partner may be admitted without the consent of all partners.
d) No partner should be expelled without dissolving the partnership.
e) No partner should operate a business which competes with the partnership. If he/ she does
so, must surrender the profits to be shared by all the partners.
f) A partner must be indemnified for liabilities incurred by him/her in the conduct of business in
good faith.
g) All partners have access to the business records.
h) All partners should display utmost good faith in handling business funds and other property.
 Advantages of partnerships.
 More capital is raised than with sole proprietorship.
 Burden of losses, risks and liabilities are shared by all partners unlike sole trade.
 Work is divided among partners i.e specialization and division of labour is possible. This
reduces work load of partners hence less fatigue unlike sole trade.

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 The business can easily expand because of large capital unlike sole trade.
 New partners can be admitted for expansion and skills.
 There is limited liability in case of limited partnership.
 Absence of one partner may not lead to closure or affect the partnership adversely as
compared to sole trade.
 They can easily borrow money from financial institutions because they have collateral
security compared to sole trade.
 There is a combination of talents and skills from the different partners.
 Better decisions can be made because of consultations from the different partners.
 The business enjoys confidentiality in its affairs since it is not required by law to publish its
accounts.
 Disadvantages of partnership.
1. There is unlimited liability in case of ordinary partnership.
2. There is delay in decision making since major decisions are to be made by the majority or all
partners.
3. Irresponsibility by a partner affects the entire business since it is borne by all the partners.
4. Death, insanity, and bankruptcy of a partner lead to dissolution of the partnership.
5. Profits generated by a hard working partner are shared by all partners.
6. Disagreements are common and this may slow down the progress of entire business.
7. Misconduct or mistakes of one partner affects the entire business and all partners.
8. Chances of expansion are limited since membership is restricted to twenty or fifty.
9. Partnership does not have a legal entity separate from the owners.
Differences between sole trade and partnership
1. Ownership. Sole proprietorship is owned by one person while partnership is owned by
two to twenty persons or up to fifty persons in case of professional partnership.
2. Capital contributions. In sole trade capital is contributed by only one person where as in
partnership it is contributed by many members.
3. Share of profits and losses. In sole proprietorship all profits and losses are taken by one
person where as in partnership, profits and losses are shared by 2 or more people.
4. Confidentiality. Sole proprietorship has top secrecy while partnership lacks this top
secrecy of its affairs,
5. Formation. Sole proprietorship only requires a trading license while partnership, in
addition to a license partnership may have to prepare a partnership deed.
6. Control and management. In sole trade, management is by one person where as in
partnership it is by many partners.
7. Sole trade is affected by absence of the sole trader but not partnership.
8. Decision making. In sole proprietorship, all decisions are made by one person whereas in
partnership decisions are made by all partners ie. Require consultations.

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 9. Liability. In sole proprietorship the sole trader has unlimited liability but in limited
partnership partners have limited liability.
 Dissolution of partnership.
This means terminating or ending of the partnership business.
 Circumstances for dissolution of the partnership:
 Voluntary dissolution. This is by consent of all members who agree to dissolve the
partnership.
 Dissolution by notice. This is when a partner writes to express his/ her intention to dissolve
the association.
 Compulsory dissolution. This is when partners are declared bankrupt due to being insolvent.
 Dissolution due to expiry of agreed period or objective. This is in case of temporary
partnership.
 Dissolution by court of law. Partners may apply to court of law to have the partnership
dissolved on grounds of misconduct or violation of agreement.
 In case of Persistent losses by partnership.
 Insanity, death, or retirement of any partner.
In case the activities of the partnership become illegal.

III.4. Joint stock companies.

A joint stock company is a corporate body or association of persons formed to carry out certain
specific functions. It is a corporate body i.e created under the law/ under the company act and has an
entity of its own quite separate from the members who comprise it.
 Types of companies.
Companies are of two types;
i. Registered companies and
ii. Statutory companies
 Registered companies: these are companies formed and registered under the company act
1962 cap 486. They are the most common types of companies in Uganda.
 Statutory companies. These are companies formed under parliamentary act. They are owned
by the government. The powers and functions of these companies are defined by the acts that
create them.
Types of registered companies;

Registered companies can be classified under the following groups;

 According to number of members; they may be classified as private or public companies.

 According to liability of members; ie unlimited or limited companies.
 Limited companies may be limited by guarantee or limited by shares.
 Private companies;

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 These are companies with a minimum of two and a maximum of fifty members excluding
employees. They have strict control over the transfer of their shares ie their shares are not
freely transferable without the consent of all other members and are usually family
businesses. ;
 Public companies;
These are companies which can have any number of members with a minimum of seven
members to infinity. Their shares are freely transferable.
Both private and public companies may have either limited or unlimited liability.
 Limited companies. A limited company is one the liability of whose members is limited to a
stated amount. Most and all joint stock companies in Uganda are limited companies. Hence,
there are private limited companies and public limited companies.
 Unlimited companies.
These are companies the liability of whose members is unlimited.
 Companies limited by guarantee.

These are joint stock companies in which each member guarantees to contribute up to a maximum
amount of money towards the liabilities of the company. In case the business fails to pay its debts a
member is called upon to pay only up to the guaranteed amount. These companies have no share
capital eg clubs , churches etc.

 Companies limited by shares.

These are joint stock companies with share capital. They are companies the liability of members is
limited to the face value of the shares held by them ie the share capital contributed. This means that
a member loses only up to the value of the share capital contributed in case the business fails to pay
its debts. His private property is safe.

 Private limited companies.

These are joint stock companies or corporate associations with a minimum number of 2 and
maximum of 50 members. They are usually formed by family members.
 Features of private limited companies.
 Membership. Number of members is between a minimum of 2 and a maximum of 50 people.
 Liability. Liability of members is limited to the capital contributed by them.
 Management. Management of private limited companies is by a board of directors who are
elected from the members themselves.
 Transfer of shares. Members cannot transfer or sell their shares to other people without the
consent of all the members.
 There is at least one director.
 Capital contribution. The company can not publish shares to appeal to the public to subscribe
to them.

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  Publication of accounts. It is not required by the law to publish its accounts to the public.
 Admission of a new member. This is done with consent of all the existing members/
shareholders.
 Share capital. Its capital is divided into small units called shares which members buy and it is
called share capital.
 Commencement. It can start business after acquiring a certificate of incorporation.
 Formation. Formation of a private limited company is by registering with the registrar of
companies after preparing a memorandum and articles of association.
 Legal entity. A private limited company has a separate legal entity from the owners. Ie. It can
sue and it can be sued in its name.
 Advantages of private limited companies.
I. More capital is contributed because of many shareholders of up to 50 members compared to
partnership or sole trade.
II. All members enjoy limited liability. Hence their property is safe in case of company’s failure to
pay its debts.
III. Death, bankruptcy, insanity, or leaving of a shareholder may not affect the normal running of
the company.
IV. Employment of specialists is possible due to large capital.
V. Specialization / division of labour can be exploited compared to sole trade.
VI. It has greater chances of increasing capital through selling shares and borrowing from
financial organizations.
VII. There is a possibility of issuing different types of shares to suit the investment habits of
members.
 Disadvantages of private limited companies.
I. Formation is long and expensive because it requires a lot of formalities to register.
II. Large amount of capital is required to start and run the business.
III. Decision making is long and difficult because it requires consulting all the shareholders.
IV. Shareholders are not allowed to freely transfer their shares.
V. Profits are shared thus little is taken by each shareholder.
VI. Limited capital is contributed because it requires only up to 50 members/shareholders.

 Public limited companies.

These are joint stock companies with a minimum number of 7 members and no maximum ie up to
infinity.
 Features of public limited companies.
 Membership. Number of members is from 7 up to infinity. Any member of the public can join.
 Capital. Capital is contributed by members buying shares. Capital is divided into small units
called shares which members buy to contribute to the capital.

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 Management. It is in hands of directors elected from the shareholders themselves.
 Transfer of shares. Shares of public limited company are freely transferable. A member
wishing to sell his/her shares can do it without consulting other shareholders.
 Publication of shares. It is required by law to prepare a prospectus to publicize its shares for
the public to subscribe.
 Formation. It is formed by registration with the registrar of companies after preparing a
memorandum and articles of association.
 Commencement. A public limited company can only commence business after it has got a
certificate of incorporation.
 Publishing of accounts. It is required by law to publish its accounts to the public.
 Advantages of public limited companies.
a) More capital is raised with large number of shareholders than other forms of businesses in
the private sector.
b) Members enjoy limited liability.ie liability of members is limited to the capital contributed.
c) Death, bankruptcy, withdrawal, or insanity of a shareholder does not affect the existence of a
public Limited company.
d) Specialization / division of labor can be exploited.
e) Employment of specialists is possible due to large capital.
f) There are greater chances of improving their capital through selling shares and debentures or
borrowing from financial institutions.
g) It has a separate legal entity hence can sue and can be sued in its own name.
h) Company shares are freely transferable. A shareholder can freely sell his shares without
consent from other shareholders when he/she gets better investments opportunities to invest
in.
i) Shareholders are safeguarded against fraud by publicizing the company accounts.
j) There is possibility of issuing different types of shares to suit the investment habits of
members.
k) Management is in the hands of specialists hence efficiency.
l) If the company is performing well ie declaring good dividends a share holder will be able to
sell his/her shares at a higher price.
m) Employees are allowed and encouraged to buy shares in the company giving them added
incentives to work.
n) Low income earners can easily invest in companies because the shares are usually issued at
very low prices.
o) Governance is by legality. Shareholders are safeguarded by legal regulations pertaining to
companies.

 Disadvantages of public limited companies

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  Formation is long and expensive because it requires a lot of legal formalities e.g preparing
a memorandum and articles of association, getting a certificate of incorporation and
trading etc.
 Decision making is slow and long because it requires consulting all shareholders in a
general meeting.
 Management is in the hands of specialists not all the owners. Hence there is no personal
touch of the owners with the business, employees and the customers.
 Difficult to control. As the company grows in size its management becomes complex.
 Double taxation. The shareholders and the company are both taxed. Hence double
taxation.
 Payment of interest. Public limited companies have to pay interest on capital every year
irrespective of the performance.
 Interest of directors may conflict with that of the company as a whole and the managers.
 There is no privacy/secrecy because the affairs of the company have to be published.
 Formation of joint stock companies.
Formation of Joint Stock Company is by registration with the registrar of companies following these
steps;
 The promoters of the company prepare the memorandum of association, articles of
association, list of directors, and a declaration which they present to the registrar of
companies.
 The registrar of companies then issues a certificate of incorporation to them. This gives a
company legal entity separate from the owners and the company is said to be incorporated.
A private limited company can now start business. In a public limited company the
promoters have to issue a prospectus to invite the public to subscribe to the shares and be
able to raise the minimum share capital.
 After which the registrar of companies issues them with the certificate of trading. This allows
the public limited company to start business.
Documents involved in the formation of joint companies
1. Memorandum of association. This is document prepared to govern the external relationship
between the company and the public. It shows the powers and limitations of the company.
 Contents of the memorandum of association. These are expressed in form of chapters or
clauses. They are;
i. Name clause. This states the name of the company with the word limited at the end.
ii. Domicile/ situation clause. This states the registered office to which all notices must
be sent. Ie the name of the country and town/city where the offices are situated
iii. Object clause. This outlines the aims and objectives for which the company is being
formed. Once the memorandum is registered the company cannot go beyond these
objectives. Hence the objectives need to be broad.

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 iv. Capital clause. This states the share capital the company wishes to raise. Ie the
maximum share capital, the types of shares, and the value of each share.
v. Liability clause. This states that the liability of members shall be limited to the face value
of share capital contributed.
vi. Declaration clause. This states the desire of the promoters to form them into a limited
company. It is signed by at least two people in case of private limited and at least seven
people in case of public limited companies who must buy at least one share
2. Articles of association.
This lays down the rules and regulations for the internal control of the company. E.g. how meetings
are to be conducted, rights and powers of shareholders, powers of directors, etc. It governs the
internal organization of the company.
 Contents of the articles of association.
 Amount of the issued share capital.
 Different types of shares and the rights of each separate types /classes of the
shares.
 Classes of loan capital issued and their rights.
 Kinds of meetings and their procedures.
 Qualifications, powers, duties, and limitations of management in the company.
 Appointment of company secretary, remuneration, powers, duties and
responsibilities.
 Appropriation of dividends and reserve policies.
 How to elect management committees.
 Salaries to management committee members.
 Provision for changing the articles of association.
 Procedure of auditing the books of accounts.
3. List of directors.
This gives the names and addresses of the directors.
4. A statement that the directors agree to start a company and act as such.
5. Declaration. This is signed by the promoters to show that all the necessary requirements
have been duly complied with and the directors agree to act as such.
6. Certificate of incorporation. After the promoters have prepared the above documents and
furnished them to the registrar of companies, the registrar issues them with a certificate of
incorporation. This document gives legal existence to the company. The company is said to
be incorporated. It has a separate legal entity from the promoters. It can sue and be sued in
its name in case of indebtedness. It gives powers to the private limited company to
commence business and a public limited company to advertise shares for the public to
subscribe.

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 7. Prospectus. This is a document prepared to invite the public to subscribe to the shares of the
company. It is published in news papers, magazines, or issued on notice boards to members
of the public inviting them to buy shares of the company. It shows the various types of shares
issued, their face values and where to buy them from. It can be used for the sale of company
debentures when the company wishes to borrow money from the public.
8. Certificate of trading. After the company has raised the minimum capital, the registrar of
companies issues a certificate of trading to the promoters. This allows a public limited
company to start the business. It is also called a certificate of commencement or trading
license.
 Capital of joint stock companies
Capital of joint stock companies is divided into small units called shares. It is hence called
share capital.
 Share capital.

A share is the smallest unit in which capital of a joint stock company is divided. It is the financial
security issued by a joint stock company as a means of raising long term capital.

The purchasers of shares pay money and get share certificates. They are then called share holders.
Share holders are the investors or owners of the company for which shares are bought/ held. They
are entitled to receive dividends which are part of the profit. Share holders are registered in a share
register of the company.

 Types of share capital;

 Nominal share capital/Registered/Authorized /maximum share capital. This is
the capital stated in the memorandum of association. It constitutes the face value/
par value of the share and the maximum amount of capital that a company can
raise by sale of shares. It is called nominal share capital because it may or may not
be raised by the company. for example 10,000,000 shares each at shs10,000
hence nominal/registered capital shs. 100,000,000,000
 Issued share capital. This is part of the authorized share capital which the
company has declared to the public for subscription. It constitutes the number of
shares offered for the public to buy and raise capital to be used to run the
company. eg Only 50,000 each at shs. 10,000 may be issued. Hence issued share
capital shs. 500,000,000.
 Unissued share capital. It is part of the registered share capital that is not yet
declared by the company for the public to subscribe.
 Called up share capital. It is part of the issued share capital that the company has
asked people to pay in form of calls. Eg a share worth shs 10,000. only Application

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 money of shs. 2,000= allotment money of shs. 2,000, and 1st call shs.3,000, hence
of shs. 7,000 from 50,000 shares means called up share capital is shs. 350,000,000.
 Uncalled up share capital. This is part of the issued share capital which the
company has not yet told shareholders to pay for example in the above example
un called up share capital is shs.150,000,000.
 Paid up share capital. This is part of the called up share capital that members have
paid. It constitutes the capital the company is using to run the business. if all the
called up share capital is paid the called up share capital is paid up share capital.
 Unpaid up share capital. This is part of the called up share capital that members
have not yet contributed/paid.
 Forfeited share capital. The unpaid up share capital has to forfeited and the
shareholder loses the amount paid. Hence forfeited share capital. Such shares
forfeited are re-issued by the company.
The capital raised by a company through selling shares is called share capital.
 Types of shares

There are two types of shares;

i. Ordinary shares ii. Preference shares.

 Ordinary shares.

These are shares held by the promoters/founders of the company. They are also called
promoters’ or founders’ shares. They represent the risk capital of the company. The holders of
such shares are not guaranteed dividends at the end of trading year before the preference share
holders get their dividends. They have the voting rights to elect the board of directors
responsible for the general policy of the company

Features of ordinary shares;

1. They have no fixed rate of dividends. The amount paid to them as profits depends on what
remains after preference shareholders have been paid. Ie take the residues of profits.
2. There is no special security for such investments other than the soundness of the
company.
3. In good years, they receive higher rate of dividends than the other share holders. But in
bad years there may be no return on capital at all.
4. When the company is winding up, the ordinary share holders are repaid after all the
creditors and other shareholders are cleared.
5. They are entitled to a voting right in the annual general meeting of the company.
6. The holders can be voted to participate in the management and control of the company.
 Deferred ordinary shares.
These are ordinary share where the holders are entitled to a fixed rate of dividends..

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  Preference shares.

These are shares which carry fixed rate of dividends and the holder is paid dividends
before the ordinary shareholders. In the event of winding up they also have the first claim on
any remaining assets of the business after the creditors have been paid off. Preference
shareholders do not have voting rights at the annual general meeting.

 Features of preference shares;

1. They earn fixed rate of dividends.
2. They assume proportionately lesser risk than the ordinary share holders and earn a lower
rate of return.
3. They are usually taken up by those who want to invest and earn profits for long term
investments in joint stock companies.
 Types of preference shares.

They are categorized as cumulative and non-cumulative preference shares.

 Cumulative preference shares.

These are shares which in addition to the characteristics of the preference shares, have a right to
arrears of the dividends carried forward until they are paid. If there are no dividends paid this
financial, the mount is paid in the subsequent years when there is profit earned..

Example; A company issues cumulative shares did not earn profits in 2 years. In the third year it
earned profits. A share holder with preference shares of shillings 2,000,000= at a fixed rate of
dividends of 20% will earn at the end of that year dividends of;

Calculation;

20
Dividends earned per year = x 2,000,000
100

= shs. 400,000

Total dividends after three years = 400,000 x 3

Cumulatively = shs. 1,200,000.

 Non-cumulative preference shares.

These are shares which are not entitled to arrears if the business fails to earn profits in any one
trading year. For instance in the above example if the preference shares issued were non cumulative,
the shareholders would only earn the dividends of the third year only shs. 400,0000.

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  Participating preference shares:

These are preference shares which in addition to fixed rate of dividends, a bonus/extra profits
depending on the amount of profits earned is given to the holders after the other shareholders are
paid off.

 Redeemable preference shares.

These are shares that can be bought back by the company.

 Irredeemable preference shares. They are shares that cannot be bought back by the
company. They stay with the company until liquidation.
 Debentures.

A debenture is a unit of loan of a joint stock company from the public. A company can borrow
money from the public by sale of debentures so that the buyer or the holder is a lender to the
company.

A debenture certificate is issued to lender and is entitled to a fixed rate of interest which must
be paid whether the company has made profits or not. The interest constitutes part of the expenses
of the company.

 Differences between shares and debentures.

 A share is a unit of capital while a debenture is a unit of loan of a joint stock company.
 Shareholders are paid dividends while debenture holders are Paid interest.
 A shareholder is one of the owners of the company while debenture holder is a lender to
the company.
 Interest on a debenture is of fixed rate and must be paid whether the company has made
profits or not. Dividends on the share holdings on the other hand may not be of fixed rate
especially the ordinary shares and in bad periods may not get dividends.
 Debenture holders are paid off first during winding up before the shareholders get their
value.
 On winding up the debenture holders are paid only the face value and outstanding
interest of their holdings but shareholders may receive more than the face value of their
shares.
 Types of debentures.
 Naked debentures. These are unsecured debentures. I.e. They are debentures without
property pledged against them. During winding up they are treated like the ordinary
creditors and are paid last after the secured/mortgaged debentures are paid off.

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  Mortgaged debentures. These are debentures with property pledged against them.
During winding up they are paid the money got from the sale of the property attached
against them. They are paid off before the naked debentures and ordinary creditors.
 Redeemable debentures. These are debentures which must be paid back on maturity
date with the due interest.
 Irredeemable debentures.. These are debentures which stay with the company as
long as it exists. They are never paid back but the holder is entitled to interest every
end of the trading or specified period. They are usually held by the shareholders.

Differences between stocks and shares.

 A share is a unit of capital of a joint stock company where as a stock is a block of shares.
 A share can only be converted into a stock if the article of association permit it and is fully
paid up.
 A share can be sold as a unit while a stock cannot be sold as a unit.
 Sale of shares.

Steps involved in selling shares:

 An advertisement is usually placed in newspapers. These contain application

forms or specify where they can be obtained.
 When received, the directors go through the applications. They can refuse or
approve them. Applicants are sent allotment letters asking them to pay allotment
money.
 When allotment money is received share certificates are issued. Applicants
become shareholders.
 Shareholders are asked to pay the balance of the share in two or three calls when
the company needs more cash.
 A shareholder, who fails to complete payment / calls, forfeits the shares and loses
the money already paid.
 Forfeited shares are re issued by the company.
 Sale of shares in installments.

Shares are sold in installments to encourage low income earners to invest in them. They are
paid for as;

i. Application money. This is paid when applying for a share. e.g. each share she. 20,000
ii. Allotment money. This is paid when a share application has been considered
and allotment money is called for egg. Each share Shs. 20,000
iii. Calls. These may be two to three calls as:

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 1st call per share shs. 30,000

2nd and last call shs. 30,000

Total value of the share shs.100,000

10.
 Differences between partnership and joint stock companies.
 Name. Partnership can take any name except when it is registered while a joint stock
company must take the name for which it is registered.
 Formation. Partnership is formed by mutual agreement among partners while joint stock
companies are formed according to company act.
 Legal entity. A partnership business does not have a separate legal entity unlike a joint
stock company which has a separate legal entity.
 Management. In partnership every partner has a right to take part in the management of
the firm but in joint stock Company, management is in the hands of a board of directors.
 Liability of members. In partnership, partners are jointly liable to the liabilities of the firm
to no limit ie. Have unlimited liability while members in joint stock companies have limited
liability.
 Membership. The number of members in partnership is between 2to 20 in case of
ordinary partnership and up to 50 members for professional partnership while in joint
stock companies membership is between 2or7 and maximum of 50 or infinity.
 Transfer of ownership. In partnership transfer of ownership is by consent of all partners
but in public limited company’s shares are freely transferred.

 Differences between private limited companies and public limited companies:

 Membership. In a private limited company, membership is between 2 to 50 members ,
while membership in public limited company it is between 7 to infinity.
 Transfer of shares. Shares in private limited companies are not freely transferable while
they are freely transferable for public limited companies.
 Issue of shares. Private limited companies do not call the public to subscribe for shares
while public limited companies call the public to subscribe for shares by issue of a
prospectus.
 Starting of business. Private limited companies can start business after acquiring a
certificate of incorporation while public limited companies start business after they have
acquired a certificate of trading.
 Publishing of accounts. Private limited companies are not required by law to publish their
accounts while public limited companies are required by law to publish their accounts to
the public.

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  Control of company affairs. In private limited companies the owners have direct control
over the affairs of the company while with public limited companies the affairs of the
company are in the hands of Board of directors not shareholders.
 Private limited companies at times need only to prepare the memorandum of association
and guided by Table A of the company act while public limited companies have to prepare
both a memorandum and articles of association.

 Winding up of a joint stock company.

This means ending up a joint stock company. It is also referred to as liquidating a company.
 Circumstances for winding up a company.
 Where the shareholders pass a resolution at a meeting to wind up the company i.e.
Voluntary winding up.
 When the company can no longer carry out its business because of lack of funds/
indebtedness or insolvency.
 If creditors apply to court of law for the company to wind up on grounds that it has not
been able to pay its debts or is unable to meet its financial obligation.
 If the period if any fixed for the duration of the company by the articles of association
expires.
 In case it is found out that the number of shareholders does not correspond with the
required minimum number.
 If the company does not commence business within a year of issue of the certificate of
incorporation.
 If the activities or operations of the company become illegal.
3.5. Stock exchange market

This is a market where already issued shares and stocks are bought and sold.

The operators in stock exchange market are; brokers and jobbers.

 Brokers: these are middle men who connect buyers of shares and the sellers of these shares
but do not possess them. They have expert knowledge of those who hold the shares, the
best prices, and companies with good reputation etc.

Any person who wishes to sell or buy shares must go through the brokers.

 Jobbers. These are the traders in the stock exchange. They sell and buy shares on their own
accord for profits. They sell or buy the shares through brokers. They are called names
depending on their behavior in the market; hence the different types of jobbers are; bulls,
bears and stags.
 Bulls. These are jobbers who buy shares when the prices are low expecting prices to rise soon

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  Bears. These are jobbers who sell their shares when their prices are high expecting it to lower
soon so that they buy in large numbers.
 Stags . These are jobbers who deal in new issues of companies expecting to sell them at
higher price in future and get profits.
Jobbers and brokers form themselves into a stock exchange council which guides all the
activities in the stock exchange.
Speculation; this means anticipation for an event to happen. Dealers in stock exchange base
on speculation in their dealings for example, expecting a rise or fall in prices so that they buy
or sell the securities they hold.
 Functions of the stock exchange council/market
1. It provides ready market for those who to buy and sell the shares.
2. It sets the prices of securities /shares of different companies listed on stock exchange.
3. It helps to direct a large part of the savings by members of the public to invest in joint
stock companies.
4. It affords investors opportunity to sell their shares when they find a more attractive security
to buy. This makes transferability of shares meaningful.
5. It publishes useful information/statistics in summary form about various companies
6. It is used as a measure of a country’s economic progress. The stock exchange index is used
as a measure of a country’s economic progress.
7. Government gets revenue through capital gains tax.
8. Companies are able to raise long term finance through the sale of shares than getting loans
with high interest.
9. It is a source of employment to those work in it ie the brokers and jobbers.
10. It provides avenue for divestiture of state enterprises; like the Uganda clays.

 Some common terms used in stock exchange.

 Par value of a share. - It is the face value of a share. Or it is the nominal value written on
the face of the share.
 It is the amount for which the shareholder is responsible in the event of a
company’s inability to meet its debts/liabilities.
 It is the original or nominal/fixed price for which a share is set/ quoted on stock
exchange and against which interest is calculated.
 The total par value of a company’s shares represents the share / registered capital
of the company.
 Market value of shares. It is value at which sells at the stock exchange. It may be less or
higher than the par value.
 Dividend. This is the amount paid out of the profits by the company to its shareholders.
They are shareholders returns on investments held by them.

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 Bonus shares. These are company reserves converted into share capital and issued to
existing shareholders. The process of converting reserves/ profits into share capital is also
called capitalization of profits. Bonus issue is also called script issue.
 Rights issue of shares. this is a right given to given to existing share existing shareholders to
buy new issues of the company at a relatively low price than its market price or the price
charged non existing shareholders/nonmembers.
 Selling prices of shares. This is the market price of a share at stock exchange. A share can
be sold at, ex div or cum div, cum right or ex right, cum cap or ex cap, prices.
 cum. Div. This stands for with dividends. After a company has declared dividends
but not paid them to members, a seller sells them with the dividends. This means
that the buyer or new shareholder is entitled to the dividends when the company
pays. Shares quoted cum div carry a higher price.
 Ex div. This stands for without dividends. It means that transfer of shares is
without dividends declared but not paid to the members. The seller is entitled to
withdrawal the dividends when the company pays. Such shares carry lower price
than cum div.
 Cum right. It stands “with rights issue” this implies that the seller sells the share with
the right to buy new issues already given to existing members of the company. This
price Is also high.
 Ex. Rights. This stands for “without rights issue”. It means that the share is
transferred without such right and the original holder can buy the new issues even
after selling his shares.
 Cum cap. It stands for “With bonus shares” this means that a share is transferred
the bonus shares declared but not yet issued to members. The price quoted is also
high for this reason.
 Ex. Cap. It stands for “with bonus capital”. This implies that, the transfer of the share
does not include the bonus capital declared but not given to members. So the seller
reserves the bonus shares to him/herself.
 Quoted companies. A quoted company is one whose shares can be bought and sold on
stock exchange. Only public limited companies can be quoted on stock exchange
 Unquoted companies. These are companies whose shares are not traded on stock
exchange. All private companies and some public companies which decide so are not
quoted.
 Obtaining a quotation. This means the act of applying to stock exchange council to allow its
shares be included on stock exchange list.
 Advantages of quoted companies.
A public limited company obtains the following advantages when its shares are quoted on
stock exchange:

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 1. Its shareholders will find ready market if they choose to sell their share holdings. Also
members of the public who wish to acquire shares in the company will be able to do so
through stock exchange.
2. Stock exchange council will only approve companies which are financially sound and
reliable. This gives guarantee to new investors and the company to get loans from
financial institutions.
3. Quoted companies are always aware of the market value of their shares. This is a guide of
what opinions investors have about the company which is useful when a company offering
new issues or redemption of its preference shares.
4. Quoted companies are required to submit their financial accounts with the stock
exchange council. These are used to prepare useful statistics that are made available to
these companies e.g. average price percentage, return on sales, rate of stock turn, etc. a
company can use these statistics for improvement.
 To go public. This is the act of converting a private limited company into a public company
to be able to be quoted and sell its shares to the public through stock exchange.
 Institutional investor. This is an institution that makes a business of investing its funds in
various securities in order to earn either profits or interest eg insurance companies, pension
funds.
 Issuing house. This is a bank that specializes in launching new issues of companies.
 Underwriter. It is an institution who for a consideration called underwriting commission
guarantees to a company launching new issues that all the shares shall be sold. If the value
underwritten shares remain unsold the underwriter buys them himself.
 Yield rate. This is the rate which shows a true return an investor earns on his investment. It
is calculated by expressing the amount of interest or dividends received as a percentage of
its market value.
Example. Mutebe has shares in mubanda company ltd quoted at shs. 500= with par value
of shs. 200= and 18% dividends. What is the yield rate?
Calculation.
dividends
Yield rate = ×100
market value of a share
Dividend rate = 18%
18
Dividend amount = ×200
100
= shs. 36
36
Yield rate = ×100
500
= 7.2%
 Securities traded on stock exchange.

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  Security. This is any document that gives the holder right to money or other property
not actually in possession.eg.
 Share certificate, which give right to shares in the assets of the company. It is a
unit of capital issued by a public company to the public in order to raise share
capital.
 Bonds. This is a loan security by the government and they carry a fixed rate of
interest.
 Debentures. This is a loan security issued by a public limited company to the
public. They carry a fixed rate of interest
 Stock. This is a bond issued by local government/authorities in order to raise
money from the public.
 Treasury bills. These are short term securities issued by the central bank against
which government borrows money from the public and they are highly liquid
financial assets.
 Other securities which cannot be sold on stock exchange may include, bills of
exchange, promissory notes, land titles, etc.
 Terms connected to securities.
1. Bearer securities. These are securities that can be transferred by mare delivery with transfer
form being made out or transfer being registered by the issuing house.
2. Blue chip. These are shares of companies of high repute and sound financial position.
3. Bonds. It is a loan security issued by the government, nationalized corporation or
company which carries a fixed rate of interest. Company bonds are called debentures.
4. Gilt edged. it is security that is absolutely safe in respect of both capital redemption and
payment of interest. Usually only bonds issued by government are gilt edged.
5. Portfolio. It is a collection of various securities held by one investor or institution.
6. A stock. This is a bond issued by government or local authority signifying a debt owed by the
issuing authority to the person named there in or the bearer and carrying a fixed rate of
interest.
 Problems faced by stock exchange markets;
 There are general low levels of income earned by people i.e .poverty. They cannot invest
in shares traded in stock exchange.
 High degree of illiteracy and ignorance. People look at stock exchange with suspicion and
prejudice thus the demand is low for their products.
 There is lack of qualified stock exchange specialists ie Jobbers and brokers.
 Weak industrial sector as many people are engaged in agriculture.
 Most businesses/Firms operate on a small scale and cannot be quoted on stock exchange.
They operate on small capital small profits etc.

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  Political unrest in some parts of the country. This has affected the expansion of the
industrial sector.
 Low interest rates on securities yet there is high rate of inflation .
 Limited government support for stock exchange markets in Uganda by developing the
financial sector and inadequate funding
 Operations of stock exchange markets are limited in the economy. They are basically in
urban centers.
 The economy is dominated by foreign and private limited companies which do not offer
their shares to the public.
 Existence of large informal sector that is not regulated and monitored hence does not use
stock exchange.
 Small private sector in the country. Most of the performing enterprises are government
owned.

I.4. CO-OPERATIVES

A co-operative is an association of individuals/persons who join together with an aim of solving their
common problems e.g farmers/growers co-operatives, consumer co-operatives etc

A co-operative society is a body of people who have agreed to co-operate with each other to attain a
common objective. It aims at members doing a certain thing/activity collectively which they have
been doing individually.

 PRINCIPLES OF CO-OPERATIVES

These are the guidelines upon which co-operatives operate

1. Open and voluntary membership; the membership of the cooperative must be open to all
who can fulfill the bylaws of the society and should not be limited by political, social, tribal or
religious differences.
2. Democratic administration; Affairs of the cooperative must be administered on a democratic
basis of one man one vote principle not according to the number of shares or sales or
produces of the society.
3. Dividend/Repayment; Any profit made by a society during the year must be passed on to
members in form of dividends or repayment. The payment of dividends depends on member
contribution in the society ie incase of agricultural co-operatives, the dividend may be paid
according to the number /quantity of produce sold to the society. In case of consumer
cooperative the dividend will be paid depending on the number of purchase from society.
4. Limited interest on share capital; it should not be the intention of a cooperative to consider
return on capital as the most important thing. Only if the society constitution provides for

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 such interest that they declare an upper limit otherwise there should be no interest paid on
share capital.
5. Co-operation with other co-operatives at local, national, and international levels. One co-
operative society must co-operate with others because they have a lot in common to share
and can learn from each other’s experience.
 TYPES OF CO-PERATIVES
i. Primary co-operatives; these are co-operatives where members are individuals.
ii. Secondary co-operatives; these are co-operatives where members are primary co-operatives.
The co-operatives join themselves into unions i.e. co-operatives unions which operate at
regional levels eg. Busoga co-operative union, Bugisu co-operative union, Banyankole
kweterana etc
 TYPES OF PRIMARY CO-OPERATIVE SOCIATIES

They are;

i. Producers’/Farmers’ or growers co-operatives.

ii. Consumers’ co-operatives/Retail co-operatives.
iii. Saving, thrift and credit co-operatives

i. Farmers’ /producers’/growers co-operative societies. They are co-operative societies

where the members are mainly farmers. They are formed with an aim of collecting their
products so that they can find market at better price.
 FUNCTIONS OF PRODUCER CO-OPERATIVE SOCIETIES:
- Transport; they transport farmers produce from areas of farming to the stores and to the
market.
- Pricing; they bargain for better prices of their output.
- Collecting and storage; they collect and store produce until they are taken to the market
- Assistance to farmers; they assist farmers in form of farm inputs. E.g fertilizers, bags, etc at
lower price.
- Advice and education; they provide advice and train farmers on better methods of farming.
- Financing. They provide loans and other credit facilities to farmers at low or no interest rate.

 CONSUMER CO-OPERATIVES SOCIETIES

They are co-operatives societies formed by consumers with an aim of buying goods cheaply from
producers or wholesalers and sell to themselves at low prices.

 Features of consumer co-operative society.

- Members are the consumers who are the customers of the business.
- Goods are brought near the consumer’s convenience.

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 - They usually buy from the producers or wholesalers in large quantities.
- They usually set two prices.ie a lower price for members and a higher price for nonmembers.
- They sell a variety of goods.
- They operate for a long period in the day for the convenience of the consumers.

 Services of consumer co-operatives.

- To provide consumer goods to members at fair prices.
- To protect the members against poor quality and dangerous goods provided other private
traders.
- To remove excessive profits enjoyed by private traders and pass them to members in form of
dividends.
- To offer advice to members regarding use and handling of certain products.
- To bring goods as nearer to members as possible.
- To protect members against exploitation by other traders.

 Problems faced by consumer co-operative societies

- Stiff competition from private formal businesses
- Insufficient funds due to low incomes of members.
- Inadequate transport facilities i.e. poor roads which are impassable during rainy season.
- Frequent price changes/fluctuations/inflations.
- Inadequate storage facilities.
- Political instability and insecurity in some part of the country.
- Inexperienced and unskilled leadership leading to poor management.
- Embezzlement of funds and corruption by officials
- Little government support.
- Poor purchasing culture. Members dodge buying from the co-operative shop and instead buy
from other retail shops reducing the sales and meeting the objectives.

 Savings and credit co-operatives (SACCO)

These are co-operatives formed with an aim of contributing money by members so that they lend to
themselves at a low interest rate. It encourages savings out of which members borrow.

- It encourages members to save.

- It lends money at low interest to members.
- It encourages members to invest in small scale businesses.
- It educates members on investment and savings.
 Functions of co-operatives.
I. Buying of produce from members at better prices.

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 II. Collecting and transporting produce from members to the co-operative stores.
III. Storage of farmers’ produces until they are taken to the market or bought.
IV. Provision of a centralized book keeping system,
V. Training of staff and other members on co-operative principles and management.
VI. Provision of banking services to encourage savings, finance or give credit to primary
societies and the members.
VII. They provide farm inputs to the farmers in form of seeds, bags, tools, fertilizers, chemicals
etc at fair prices.
VIII. Selling the produce from farmers to marketing boards or other better markets.
IX. Processing. They process farmers produce before they are sold to marketing boards or
other markets for example cotton, coffee.
 Problems faced by co-operatives in Uganda
- Lack of sufficient transport facilities, like trucks, good roads especially in rural areas
- Failure of members to pay their subscriptions
- Mismanagement of cooperatives due to lack of skilled management staff
- Embezzlement of the funds by officials
- Price fluctuations which affect planning of co-operatives
- Government interference in the affairs of co-operatives.
- Political Instability in some parts of the country which causes insecurity.
- Inadequate storage facilities.
- Lack of adequate finance.
- Low prices of the produce does not encourage farmers to become members
- Failure to pay members in cash has forced them to sell their produce outside the cooperative.
- Crop failure due to weather failures, pests and diseases.
- Poor quality output due to poor methods of farming and storage.
- Low market for crops due to low quality output.
 SOLUTION TO COOPERATIVE PROBLEMS
- Borrowing from government to get finance for the co-operatives.
- To construct many and large stores to keep goods for a long time and release them when
there is market.
- Government liberalization of the economy to reduce its interference in the affairs of the
co-operatives.
- Government maintaining and up grading of roads even in the rural areas or production
areas. Also providing vehicles and trucks to assist in the collection of produce.
- Education of members through co-operative colleges, seminars and frequent workshops
etc.
 Finance of co-operatives.

Co-operatives get finance from the following sources;

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 - Sale of shares to the members
- Subscription fees from members
- Loans from financial institutions like banks
- Profits / reserves converted into capital or bonus shares to members.
- Donations, gifts, and grants from government.

I.5. MARKETING BOARDS

A marketing board is a business set either by government or individuals to look for market for various
or specific goods and services in the country.

 FUNCTIONS OF MARKETING BOARDS IN UGANDA

- Collecting and storing of produce bought from farmers.
- Buying produce from farmers at reasonable prices.
- Carrying out research into agricultural and marketing problems and ensures quality control.
- Assistance given to farmers e.g. fertilizers, farm tools and other inputs at reduced prices.
- Stabilizing prices for agricultural produce by use of stabilization funds
- Control of production by use of quotas.
- Advisory services extended to farmers.
- Selling produce to local processors and foreign markets.

 PROBLEMS FACED BY MARKETING BOARDS IN UGANDA

- Poor Transport facilities due bad road in rural areas.
- Poor quality produces where farmers mix poor grades with good ones.
- Political interest i.e. where unskilled administrators may be nominated by the government but
mess up the marketing boards.
- Over production where farmers harvest in excess/surplus that may lack market.
- Competition for market with business men who privately offer high prices to farmers.
- Price fixing is difficult because it fluctuates with the world market price.
- Natural disasters like floods, drought.
- Political instability in some parts of the country.
- Insufficient crop finance to buy produce from farmers.
- Corruption and embezzlement of funds by managers.
- Lack of government support.

 Types of marketing boards.

1. Produce marketing Boards. This marketing board which handles a number of crops e.g
Produce marketing boards in Uganda handling crops like maize, millet, etc.

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 2. Commodity marketing board. These are marketing boards which handle only commodity or
crop e g coffee marketing board for coffee only etc.
3. Advisory marketing board of Uganda. This is marketing board which does research and offers
advice to farmers on better farming methods and practices.
3.8. Public sector.

The public sector consists of establishments that are owned by government and are engaged in
commercial activities. It includes; Public corporations, Parastatal bodies, Local authorities

 Reasons for government involvement in commerce/ public sector.

Government sets up enterprises for the following reasons:

I. To provide essential services which if left to private enterprises the public would be exploited.
Eg electricity, water, etc.
II. To Provide services which are unprofitable and yet useful to the society and private
individuals can not engage in eg Railways corporation.
III. To engage in establishments which are very costly, require large amount of initial capital out
lay and the private sector cannot raise like construction of a road.
IV. To make profits. This adds to its other revenue sources to be used to benefit the whole
society.
V. To provide risky activities which cannot be left in the hands of the private individuals eg
atomic energy.
VI. To have monopoly power and avoid duplication in the provision of some services and avoid
wasting resources.
VII. For political reasons for example maintaining it political ideology eg socialism in Tanzania.
VIII. To reduce businesses owned by non citizens and maintain national prestige eg. Through
Nationalization of the private businesses owned by foreigners. Ie reduce dependence on
foreign investors.
IX. To enjoy economies of scale of large scale enterprises because government enterprises are
monopolies and can easily expand in size.
X. To provide non prestigious services e.g. garbage in collection in towns which private sector
may not do.
XI. To create a widely planned economy, provide employment opportunities and equal or
balanced regional economic growth.
 Disadvantages of public enterprises.
i. Provision of essential services sometimes proves expensive and causes losses. Such losses are
passed over to the general public in form of increased taxes.
ii. Government enterprises are usually very large in size which leads to diseconomies of scale to
them.

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iii. Employees are not directly answerable to the real owners of the units. Hence their
performance may not be to the desired standards.
iv. They are entrusted to the politicians who may have little knowledge of business techniques
e.g. They take decisions which may appear desirable to the public but economically unsound
leading to inefficiency of the firms.
v. They out compete private businesses hence discouraging private investment in some fields.
vi. Government enterprises are monopolies which in itself is undesirable, leads to inefficiency
and production of poor quality services.
vii. Delays in decision making due to bureaucracy and red tape administration leads to delay in
progress of government firms.
viii. Government enterprises are associated with too much corruption, embezzlement of fund and
miss use of resources which increases their running costs. This is because of lack of close
supervision.
ix. There is lack of self-initiative due to lack of self-interest hence invention and innovation is
reduced.
x. There is competition with the private sector especially the non-monopolized firms.
i.

 Differences between public corporations and public companies.

i. Ownership. Public companies are owned by individuals or shareholders between
7(seven) up to infinity members while Public corporations are owned by the
government which has majority or all the shares
ii. Control and management. In public companies management is in hands of the board
of directors elected from the shareholders themselves while with public corporations
management is under board of directors appointed by the government.
iii. Raising capital. Public companies invite the public to subscribe to the share through
issuing a prospectus. While public corporations are financed by the government taking
the majority or all the shares or taxation.
iv. Distribution of profits. In public companies sharing of profits or dividends depend on the
share holdings and class of shares while in public corporations, the profits are all taken
by the government.
v. Purpose of formation. A public company is profit making while a public corporation is to
provide goods and services at reduced prices.
vi. Formation. Public companies are incorporated by the registrar of companies under
company act while public corporations are by public act of parliament.
vii. Accountability. Public companies are accountable to shareholders in an annual general
meeting while public corporations are accountable to the government.

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  Differences between public corporations and public companies.
a. Ownership. Public companies are owned by individuals or shareholders between
7(seven) up to infinity members while Public corporations are owned by the
government which has majority or all the shares
b. Control and management. In public companies management is in hands of the
board of directors elected from the shareholders themselves while with public
corporations management is under board of directors appointed by the government.
c. Raising capital. Public companies invite the public to subscribe to the share through
issuing a prospectus. While public corporations are financed by the government
taking the majority or all the shares or taxation.
d. Distribution of profits. In public companies sharing of profits or dividends depend on
the share holdings and class of shares while in public corporations, the profits are all
taken by the government.
e. Purpose of formation. A public company is profit making while a public corporation is
to provide goods and services at reduced prices.
f. Formation. Public companies are incorporated by the registrar of companies under
company act while public corporations are by public act of parliament.
g. Accountability. Public companies are accountable to shareholders in an annual
general meeting while public corporations are accountable to the government.
 Forms of public enterprises.
1. Public corporations.
A public corporation is a joint stock company in which the government holds either all or the
majority of the shares. It is created by the act of parliament which clearly defines its aims and
objectives eg Uganda railways, Uganda posts, Uganda telecommunication, Uganda broad Casting
Corporation etc.
It operates like any other ordinary joint stock company and aims at making profits which are
surrendered to the government.
 Features of a public corporation
i. Ownership. It is owned by the state where the government has the majority or all the share holdings.
ii. Control and management. The management and control is by board of directors appointed by
government.
iii. Raising of capital. Public corporations are financed by government purchase of shares as a whole or
partially taking on the majority of the shares or taxes and the other taken by private individuals.
iv. Distribution of profits. Profits earned are taken by the government to be used to finance its projects
for the public.
v. Formation. It is formed by an act of parliament which defines the powers and objectives of the
corporation.
vi. Purpose of formation. It is formed to provide services or goods at reduced prices to the public.
vii. Accountability. It is accountable to the government and not individuals.

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 2. Parastatal bodies.
These are organizations set by the government to perform specified functions. These
may not be commercial nor do they aim at making profits e.g marketing boards, Uganda
examinations board, etc. They do not have share capital. Management is in the hands of
board directors appointed by the government. Examples of parastatal in Uganda are;
3. Local authorities;

These are either; local councils, urban authorities, town or municipal councils, and city
councils and other administrative bodies which perform certain commercial functions to the
public eg. Supply of water, primary schools, sports stadiums, etc. They finance the purchase
of fixed assets by borrowing from the government and repaying the loan from the revenue
earned by them.

Joint venturing. This is another way in which government gets involved in commerce. The
government is in joint arrangement with the private sector by either taking majority shares or just
some of the shares so as to control the activities of the concerned company.

Nationalization. This is where privately owned firms are converted into state owned firms. It is
another form in which government operates in businesses/ commerce.

Government also participates in commerce through the three ruling sectors ie executive, judiciary
and parliament. These are involved in enacting acts and ensuring that they are fulfilled.

 Government revenue.

For the government to perform the several services at free or subsidized cost to the people, eg.
Education, health, law and order, defense, supply of water, assistance to farmers and business men
etc. it requires a lot of money.

The following are the sources of government revenue;

i. Taxation i.e. taxes charged from individuals, their incomes and property.
ii. Profits got from corporations run by the government.
iii. Loans from the public and other countries or public debt.
iv. Donations, grants and gifts from other countries or friends.
v. Nationalization of private enterprises.
vi. Sale of government enterprises or privatization.
vii. Fines eg court fines.
viii. Incomes from use of public property eg rent, rates.
ix. Fees eg court fees,
x. Other sources like; motor and trade licenses, passport etc.

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  Taxation.

A tax is a compulsory payment by individuals and businesses to the government to finance its
projects that benefit the public. It is a compulsory non quid proquo payment to the government. It is
the main source of government revenue. In Uganda taxes are assessed and collected by the Uganda
revenue authority.

Types of taxes;

There are two types of taxes.

 Direct tax and indirect tax

1. Direct tax.

This is tax whose impact and incidence is on the same person. It is a tax charged on
individuals, organizations, property, and incomes of individuals or businesses. It is paid directly to
revenue authority.

Direct tax includes;

 Income tax. This tax on individual’s income received. Eg pay as you earn(PAYE)
 Capital gains tax. It is tax charged on capital increaments for example appreciation
of an asset.
 Estates duty. Tax charged on property owned by an individual. It is also called
property tax.
 Death tax. It is tax charged on property of the deceased. It is paid by the person
who takes over ownership after death of an individual.
 Gift tax. It tax charged gifts or transfer of wealth from one living person to
another.
 Poll tax. It is tax imposed on every family head irrespective of the income earned.
It is regressive tax.
 Graduated tax. It is tax charged on each adult person in the country.
2. Indirect tax.

It is tax whose incidence can be transferred to another person by increasing prices. The tax is paid by
the producers or sellers but can be passed on to the final consumer by adding it on to the final prices.

Indirect taxes include;

i. Customs tax/duty. This is tax imposed on goods crossing borders of the country ie
goods imported or exported. they are therefore of two types;

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  Export tax. This is tax charged on goods being sold to another country ie exports.
It is raised to obtain revenue and discourage exports so as satisfy local demand.
 Import tax. This is tax imposed on goods bought from another country ie.
Imports. It is charged to increase a country’s income but also to discourage
importation of goods in order to protect the infant industries and other bad
effects of imports.
ii. Excise tax/duty. It is tax imposed on locally produced goods in the country.eg on soft
drinks, cigarettes, etc
iii. Value added tax (VAT).it is tax levied on value added to a commodity at every stage of
production. It is both sales and consumption tax.
iv. Sales tax. It is tax on sales or purchases transaction of certain goods and services.
v. Sumptuary tax. It is tax imposed on consumption of specific goods to discourage their
consumption. Eg tax on cigarettes, alcoholic drinks etc.
vi. Octori tax. This is tax imposed on goods passing through the territories of another
country.
vii. Commercial transaction levy (CTL). It is tax imposed on every transaction done by a trader
eg sales, or offers of a service.

Indirect tax can be charged as;

i. Specific / per unit / per quantum tax; this is tax imposed based on the amount of goods
produced, sold, or bought.
ii. Advalorem tax. It is tax charged according to the price/value of a commodity.

Taxes collected by Uganda Revenue authority.

 Value added tax(VAT) .
 Income tax.
 Corporation tax/profit tax
 Export duty.
 Import duty.
 Excise duty.
 Estate duty.
 Capital gains tax.
 Withholding tax
 Transit tax(octori tax)
 Environment tax for example on old vehicles.
 Rental tax income tax.
 Gaming tax.
 Sumptuary tax.

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  Domestic taxes.
 These are taxes collected by Uganda revenue authority under the domestic tax department.
They include;
 Value added tax(VAT)
 Excise duty
 Lodge or Hotel tax.
 Rental tax
 Gaming tax.
 Estates duty
 Corporate tax.
 Capital gains tax.
 Sumptuary tax.
 Taxes collected by local authorities.

These are taxes collected by administration authorities like districts, town councils,
city councils, and municipalities. They are;

 Property tax in cities and towns.

 Sign post fees
 Market dues
 Park fees
 Street parking fees
 Local service tax
 Ground rent. Etc.
 Basic tax computations.

Individual tax. This is the tax charged on the chargeable income of an individual. Chargeable
income is the gross income of an individual for the year less deductions allowed ie less expenses
and costs incurred in earning the income.

Gross income for kasale from different source in the year 2016.

Business income shs. 1,000,000.

Employment income shs. 2,400,000

Property income shs. 500,000

In addition, incurred expenses and losses to shs. 1,200,000 to earn the income. Shs. 150,000 out
of the income is exempted from tax.

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 Required; determine Kasale’s gross income and chargeable income.

Gross income = Business income + employment income + property income – exempt income

= (1,000,000 + 2,400,000 + 500,000) – 150,000

Gross income = shs. 3,750,000

Chargeable income = Gross income - Expenses and losses

= 3,750,000 - 1,200,000

= shs. 2,550,000

Employee’s relief (Tax Exempt income )

This refers to gains or incomes that are not included in the chargeable income of the employees and
therefore not taxable on the employee. These include;

 Employee income that is bellow taxable threshold. Currently it is shs 235,000

 Pension
 Discharge or reimbursement of medical bill incurred during sickness.
 Life insurance premiums paid by a taxable employer (company or individual ) for the benefit of
the employee.
 Expense incurred by the employee ie discharge or reimbursement for the employee.
 Meals and refreshments or value of meals provided to all employees at equal terms.
 Employers’ contribution to retirement fund for the benefit of the employee.
 Any cash benefit whose value is less than shs. 10,000 a month.
 Relief of 25% of terminal benefit to employees who have served the employer for more than
10years.
 Official employment income of persons employed with the armed forces.ie UPDF.
 Employment income of a Ugandan posted to work Uganda diplomatic missions abroad.
 Employment income of persons employed by the East African development bank.

Employment income.

Most people pay income tax on income from employment and is recovered at source through a
system called pa as you earn (PAYE).

Employment is deemed to exist where there is a legal master –servant relationship.

Employment income includes among others;

1. Any salary, wages, leave pay, gratuity, and bonus.

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2. Allowances such as travelling, entertainment, housing and medical allowances.
3. Compensation for termination of contract of employment.
4. Value of any benefits, advantage or facility granted to the employee. These include items like
cars, house, etc.
Pay as you earn.
The employers who then remit to URA collect the PAYE. The employers are authorized to withhold
the appropriate amount from the employees’ monthly income and remit to URA by the 15 th day of
the following month.
The tax rate for PAYE (individual income tax on employment income)

Income is usually taxed in relation to defined year of income. The rate per individual is therefore
based on a particular year. However in case of PAYE , the rates are administratively charged as on
monthly rates as shown in the table below;

Monthly payment/income Tax rate

1. Not exceeding Nil/0%
shs. 235,000
2. Exceeding sh. 235,000 but not 10% of the income by which chargeable income exceeds
exceeding shs. 335,000. shs. 235,000
3. exceeding shs. 335,000 but not Shs. 10,000 + 20% of the income by which chargeable
not exceeding shs. 410,000 income exceeds shs.335,000
4, exceeding shs 410,000 a. Shs,25,000 +30% of the amount by which chargeable
income exceeds shs 410,000.
b. where chargeable income exceeds shs. 10,000,000 an
individual income is charged 10% by which the individual
income exceeds shs. 10,000,000

Kato a Ugandan earns a monthly of shs. 650,000, compute his tax payable using the PAYE monthly
rate as shown in the table;

Kato’s income = shs. 650,000

Kato falls in the fourth bracket.

PAYE payable = 25,000 + 30% of monthly income by which it exceeds shs. 410,000.

= 650,000 + 30%(650,000 – 410,000)

= 650,000 + 30% x 240,000

= 25,000 + 72,000

= shs. 97,000.

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PAYE annual tax rates:

Annual income Tax rate

1. Not exceeding Nil/0%
shs. 2,820,000
2. Exceeding sh. 2,820,000 but not 10% of the income by which chargeable income exceeds
exceeding shs. 4,020,000. shs. 2,820,000
3. exceeding shs.4,020,000 but not Shs. 120,000 + 20% of the income by which chargeable
not exceeding shs. 4,920,000 income exceeds shs. 4,020,000
4, e xceeding shs 4,920,000 a. Shs,300,000 +30% of the amount by which chargeable
income exceeds shs 4,920,000
b. where chargeable income exceeds shs. 120,000,000 an
individual income is charged 10% by which the individual
income exceeds shs. 120,000,000

Example 2. Mabirizi an employee of Saracen Uganda ltd earns an annual income of shs. 18,000,000.

Calculate his,

a. Monthly PAYE tax.

b. Annual PAYE tax.

Solution;

Annual income
a. Monthly income =
12
18,000,000
=
12
= shs.1, 500,000
Monthly PAYE tax = 25,000 +30 %( 1,500,000 – 410,000)
= 25,000 + 30% x 1,090,000
= shs. 352,000
b. Annual PAYE = 300,000 +(30% of 13,080,000)
= 300,000 + 3,924,000
= shs. 4,224,000.

Individual Rental tax.

Under this, the state applies to residential individual persons. The law provides that the individual
rental income is segregated and taxed separately as though it was the only source of income for the
tax payer. Rental is earned by an individual from letting out or hiring out immovable property in
Uganda (land and buildings) for income tax purposes it does not matter whether the building is let
out as a residential or commercial usage.

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The rental incomes of a resident individual for a year of income are charged to tax at a rate of 20% of
a chargeable income in excess of the tax free allowance/ threshold of shs. 2,820,000 per annum.
However in determining tax due, a fixed deduction of 20% per annum is allowed on the gross annual
rental income of residential individual.

Computation of rental tax for residential individuals.

In computing the tax the following are considered:

a) Gross income on all rents earned during the year.

b) Deduct 20% statutory expenses on the gross rent.
c) Apply a rate of 20% on chargeable income to get the tax.
d) Deduct tax allowance of shs. 2,820,000 at the chargeable rental income.

Example.

Okello earns rent of shs. 2,500,000 From a house at Walukuba, shs. 900,000 from one at Mbiko
and shs. 600,000 from a house at Namulesa. Compute okello’s rental income tax to be paid to URA.

Solution:

Gross rental income = income of rent from the three houses

= 2,500,000 + 900,000 + 600,000

= shs. 4,000,000

Less provision for expenses 20% of 4,000,000

= shs. 800,000

Chargeable income = 4,000,000 – 800,000

= shs. 3,200,000

Less; rental annual tax free allowance shs. 2,820,000

= shs. 380,000.

Net rental charge = 380,000 x 20%

= shs. 76,000

Non tax revenue .

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This refers to duties, fees and levies that are charged by government for the provision of specific
services and penalties for specific offences. They include; stamp duty, motor vehicle on fees
transaction fee like registration fee, charge of ownership fees, duplication fees, alteration fees,
registration fees etc. collected by URA. URA also collects other non-tax revenue on behalf of
ministries and other government departments. These include; passport fees, work permit fees, court
fees, fines, traffic expense venalities, land transfers fees, royalties, business and company registration
fees, tender fees, and permit fees.

VALUE ADDED TAX (VAT)

It was introduced in Uganda on 1st July 1996 under the VAT act. It is charged on value added at every
stage in the chain of production or distribution. It is ultimately borne by the consumers currently VAT
rate is 18%.

Reasons for introducing VAT

 To broaden the tax base

 To encourage exports. Since there is no VAT on exports and in case it is charged on goods in
transit it is refunded as soon as they leave the country.
 To fight tax evasion. It is difficult to evade.
 Naturally non contributionary provided there are a few exemptions and zero ratings.
 To improve tax administration by reducing the costs associated with the collection of sales tax
and C.T.L.
 To remove the cost of cascading effect associated with sales tax and C.T.L. Cascading arises
when tax is charged both on inputs into some process and on the outputs in the same
process.
 VAT is based on ability to pay approach.
 Efficiency. It is self-policing.
Chain of distribution

Stages Activities Purchase Selling prices Value added VAT at 18%

prices (shs) (shs) (shs)
(shs)
1. Importer into 10,000 - 10,000 1,800
the country
2. Importer (localj 10,000 12,000 2,000 360
distribution)
3. Wholesaler 12,000 15,000 3,000 540
4. Retailer 15,000 20,000 5,000 900
5. Final consumer 20,000 - - 3,600

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Illustration

From the above illustration, it is indicated that the final consumer pays VAT of shs 3,600. The total
price paid would be shs 23,000 inclusive of VAT. However this VAT would have been collected and
paid in parts or installments by different persons in the chain of distribution as follows.

STAGE VAT

i. Importer to customer 1,800

ii. Importer to local distributor 360
iii. Wholesaler 540
iv. Retailer 900

Total value added tax 3,600

 Value added tax computation

VAT = Taxable Income x VAT rate, where

Taxable value: Is the price of taxable goods or supply excluding VAT. The current rate is 18%.

 VAT MECHANISM:

The VAT mechanism involves three items

o VAT on purchase and expense. This is called input tax

o VAT on sales. This is called output tax
o VAT liability = output tax – input tax

NB: Where output tax exceeds the input tax, the tax payer pays the difference as VAT to URA.
However where the input tax exceeds the output tax. The tax payer claims the difference as a VAT
refund from URA.

Example:

1. Given that output tax is shs. 100,000 and input tax is shs. 120,000. Show VAT claimed

VAT claimed = Output tax – Input tax

= 120,000 – 100,000
= shs 20,000
2. John bought 10 bags of posho from Job at shs. 2,000,000 and sold to Joan at shs 2,400,000.
What is VAT liability?
VAT liability = Output tax – Input tax

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 Input VAT (VAT on purchases) = 18% x 2,000,000

= shs. 360,000

Output VAT (VAT on sales) = 18% x 2,400,000

= shs. 432,000.

VAT Liability = shs (432,000 – 360,000)

= shs. 72,000

Joan will pay VAT of shs 72,000 to URA

 Roles of Uganda Revenue Authority:

 Accesses and collects tax revenue
 Advises government on issues relating to public revenue, expenditure and tax policy.
 It identifies tax payers.
 It ensures the tax compliance is adhered to through tax education i.e provides
information to tax payers regarding their responsibility of paying tax.
 Penalizes tax offender’s i.e cracks down on all tax defaulters.
 Accounts for all tax revenue collected to the minister of finance and public.
 It expands the tax base by coming up with different taxes.
 Measures used by Uganda Revenue Authority to ensure that traders pay tax
 Tax education through the media e.g. radio, newspapers, i.e sensitizing the public on
the benefits of paying tax.
 Giving rewards to traders or companies that contribute highest taxes.
 Ensuring proper accountability for taxes collected.
 Using efficiency and highly trained personnel’s.
 Controlling smuggling of goods.
 Easing the system of paying tax by use of electronic or internet methods i.e make the
procedure short.
 Ensuring the principle of equity i.e based on income ability.
 Simplicity i.e making tax laws easily understood.
 Consistency and fairness in application of tax laws and rules by fighting corruption in
assessing and collecting taxes.
 Ensuring that traders keep business records.
 Penalizing traders who evade taxes for example imposing heavy fines to defaulters or
evaders.
 Publishing names of tax payers who evade tax payments in the media or putting
shame list of the tax evader.
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  Fighting corruption and embezzlement of tax revenue by the tax officials.
 Extension of tax payment period to tax payers who may fail to pay with in the
stipulated time.
Other terms in relation to taxation.
I. Taxable capacity. It is the ability of the tax payer to pay the tax levied on to him/her and is
able to maintain his standard of living.
II. Tax base, it is the range of activities or items on which taxes are levied.
III. Tax evasion. It is deliberate refusal or dodging of a tax payer to pay the tax imposed on to
him or her.
IV. Tax avoidance. It is where a tax payer uses the weaknesses involved in a tax system to pay
less or not to pay the tax.
V. Incidence of a tax. It is the final resting place of the tax. Ie the final person who pays the
tax imposed by the tax authorities.
VI. Tax burden/liability. The amount of tax charged and to be paid by a person or business to
tax officials.
VII. Tax havens. These are countries that offer lower tax rates to attract foreign investors. eg.
Switzerland.
VIII. Impact of a tax. It is the first point of contact for the tax. The person who bears the first
responsibility to pay the tax.
IX. Taxable income. It is the proportion of a person’s below which tax is not charged . It is
income above the thresh hold and subjected to tax.
Thresh hold. It is the minimum amount of income that is not subjected to tax.
X. Progressive tax. It is tax that increases with increase in income of the tax payer and
reduces as a tax payer’s income is low. It favors low income earners and ensures equal
distribution of incomes.
XI. Regressive tax. This is tax which is raised as average incomes of tax payers reduce and
reduces as the average incomes increase. This favors high income earners and encourages
hard work.
XII. Proportional tax. This is tax which is constant at all income levels.

 Principles/canons of a good tax.

i. Equity: People of different income levels should pay different tax amounts and those of the
same income pay the same tax.
ii. Economical: The cost of collection and administration should be minimal and should not
Exceed the tax collected.
iii. Convenience: The timing and mode of payment should be convenient to the tax payer
E.g. time for the availability of the income.

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iv. Flexibility: It should be able to change according to changing requirements of the economy.eg
during a boom taxes should be higher and lower during a recession.
v. Productivity. A good tax should generate enough revenue to the government and should not
adversely affect productivity of the economy.
vi. Certainty: There should be clarity on how to pay the tax, the amount and time of payment.
The tax payer and collector should be aware of the modalities avoid disharmony.
vii. Diversity. A good tax should have a variety of tax bases not only a single tax base.
viii. Simplicity: It should be simple and easy to understand by both the tax payer and
Collector, easy to calculate and administer.
ix. Elasticity: A good tax should rise with increase in people’s income. It should be able to
increase the price of the commodity without reducing demand.
 Reasons for paying taxes:
i. To provide revenue to the government to be used o run its activities for the benefit of the
public.
ii. To control the flow of foreign goods in the country and improve on the balance of
payment position.
iii. To reduce on income inequalities when the rich pay more than the low income earners.
iv. To encourage people to work hard when high taxes are charged to low income people and
low tax to the rich.
v. To create employment when the tax paid is invested in public investments or works which
lead to more employment opportunities.
vi. To control inflation when peoples’ incomes are taxed and reduce spending or excessive
demand.
vii. To reduce consumption of certain goods which are harmful to life eg smoking, alcoholic
drinking.
viii. Promoting self-reliance as opposed to borrowing.

 Government Control of private sector:

The government controls the prate sector to ensure public wellbeing and without which the public
would be over exploited or hurt by profit motivated business men. The methods used are;

i. Bureau of standards. This ensures specific standards for quality, of various goods made or
imported in the country eg specifications in mix, weights, etc
ii. Price control. This involves maximum and minimum price legislations to ensure that the
general public is not cheated through over charging consumers or under charging the
producers/farmers.
Maximum price protects consumers from being overcharged, it is the highest price set by
government above which it is illegal to charge the consumers.

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 Minimum price is the price set by the government below which it is illegal to charge. It is
used to protect producers/ famers from being cheated by business men. It is therefore to
motivate producers to produce more.
iii. Consumer protection laws. These are various laws set by the government to ensure that
the consumers’ interests are protected and are not cheated of their hard earned money,
eg sale of goods act, food and drug act, etc
iv. Trade licensing. This makes government to ensure that only right people get the licenses,
and wrong people are withdrawn of the licenses.
v. Financial control. This is to ensure stability of the value of the currency using several
methods to control credit in commercial banks and other financial institutions.
vi. Exchange control. This is to ensure external stability of the currency by not exposing the
local currency to the foreign one.
vii. Imposing taxes on goods produced by the private sector.

Methods used by government to support private sector.

i. Training and provision of information through workshops, seminars and tours.

ii. Encouraging financial sector to extend credit to the private sector.
iii. Lobbying for market both internally and externally eg the AGOA.
iv. Physical and social infrastructural development eg roads, security, electricity etc
v. Removal of rigid regulations affecting the private sector eg environmental impact
assessment reports etc.
vi. Encouraging formation of business associations. Eg UMA.
vii. Provision of subsidies eg tax holidays, export incentives like customs draw backs etc.

Consumer protection:

These are various laws enforced by the government to ensure that consumer’s interest is protected
and is not is not cheated of his hard earned money.

Reasons for consumer protection.

 To protect them against exploitation by the sellers especially during scarcity of goods by over
charging them.
 To guard against consumption of poor quality or adulterated goods.
 To protect consumers from being cheated by use unstandardized weights and measures.
 Protect them from misleading persuasive advertising with false description and undue influence.
 To guard consumers from consumption of dangerous, harmful, expired or unhygienic goods.
 Protect them from consuming any type of imports dumped from other countries.

Methods of consumer protection

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 I. Weights and measures act. This is to check on correctness of weights and measures used
by the producers/sellers.
II. Price control. It involves fixing prices of essential goods.
III. Public health act. This empowers inspection of foods and drugs for fitness of human
consumption.
IV. Encouraging formation of consumers’ associations. To protect consumers interests.
V. National bureau of standards. This is to enforce standard quality and quantity of goods
produced or imported with in the country.
VI. Encouraging formation of business associations. These ensure satisfactory standard of
their products eg. UMA
VII. Trade licensing. This involves giving licenses to approved business men and withdrawing
them from those found unscrupulous
VIII. Trade description act. This ensures that sellers don’t make false and miss
Leading claims about his products eg. It is an offence to sell an item, saying it is made of
say wheat, yeast and sugar, when in fact there is no sugar or poor quality yeast. Also to
include warnings like excess drinking of alcohol is dangerous to your health.
IX. Food and drugs act. This prevents the manufacturers from including substances in their
products that are likely to have adverse effects on the users’ health. It also requires to
include on the labels or packages of items used as food, drinks and medicine the
ingredients used in making them to be shown.
Caveat emptor. It is a term used to protect consumer from being exploited due to
ignorance. It stands for “let buyer be aware”
Caveat Vendor. It stands for “Let seller be aware” it protects traders from being cheated
by other middle men in business.

Consumer initiated protection methods

i. Formation of consumer associations. These receive complaints from members about high
prices, poor quality goods and services, etc investigate them and approach producers and
sellers to correct them.
ii. Formation of consumer cooperative societies. These buy goods from manufacturers to sell to
their members at low prices compared to the prices charged by other traders.
iii. Writing letters to the press raising their complaints about the malpractices of the traders and
manufacturers correct them for fear of loss of market.

Manufacturers’ initiated consumer protection methods.

i. Formation of business associations. These ensure satisfactory standard of their products eg.
UMA.

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 ii. Resale price maintenance. This is where producers fix prices at which retailers should sell their
goods to the consumers.
Problems faced by consumer protection;
ii. Inadequate funds by the government. This hinders enforcement of the various acts.
iii. Ignorance of the consumers about their rights. This makes them fall victims of
exploitation.
iv. Poverty among consumers. this makes traders take advantage to sell to them expired
goods and substandard goods that suit their financial standards.
v. High level of illiteracy. This makes them be exploited. This makes some traders
vi. Corruption and embezzlement of funds. This makes traders access sensitive licenses to
operate businesses.
vii. High tax rates. This leads to high prices charged by traders.
viii. Political influence from politicians. This makes for instance UNBS officials to act with
fear and favor in their duties.
ix. Lack of country wide awareness and education on the need for consumer protection.
 Privatization.
This means transfer of publically/government owned enterprises into private owned businesses. It is
the sale of public enterprises to private individuals by the government.
 Forms of privatization
i. Partial sale. This is when a portion of government ownership is sold to the private
investors.
ii. Joint venture. This is when the government runs the business jointly with the private
firms. The government can for example hold 49% while private individuals hold 51% of the
shares.
iii. Divestiture. This is the total sale of the public enterprise to private enterprise/firms.
iv. Mortgaging. It is also called sale and lease back privatization. It is a temporary sale of the
public enterprises to private firms with intent to repossession by the state.
v. Contracting. It involves selling the business management to private individuals/firms at
the expiry of which it goes back to the government.
vi. Cost sharing. This is where the government retains the ownership but the beneficiaries
contribute towards the running costs e.g public universities, public toilets etc.
 Reasons for privatization.
i. To bring about efficiency as a result of competition from private firms.
ii. To reduce public expenditure on public enterprises as they require a lot of money to keep
them run.
iii. To generate revenue from the sale of the enterprises and taxes paid by the enterprises.
This revenue can help the government to restructure the economy and pay its debts.

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iv. To eliminate corruption, misappropriation or embezzlement of funds which is common
with public enterprise
v. To create more employment opportunities in the private sector when it expands.
vi. To stimulate the private initiative therefore encouraging innovation and creativity.
vii. To encourage productivity and performance of the enterprises because of close
supervision and employment of skilled persons.
viii. To encourage foreign investment and increase capital inflow.
ix. To promote transfer of technology from more developed countries.
x. To fulfill the donor agency and countries’ eg World Bank conditions.
xi. Diversification of the economy.
 Advantages of Privatization
i. It brings about efficiency as a result of competition from private firms.
ii. It reduces public expenditure on public enterprises as they require a lot of money to keep
them run.
iii. It generates revenue from the sale of the enterprises and taxes paid by the enterprises.
This revenue can help the government to restructure the economy and pay its debts.
iv. It eliminates corruption, misappropriation or embezzlement of funds which is common
with public enterprise
v. It creates more employment opportunities in the private sector when it expands.
vi. It stimulates the private initiative therefore encouraging innovation and creativity.
vii. It encourages productivity and performance of the enterprises because of close
supervision and employment of skilled persons.
viii. It encourages foreign investment and increase capital inflow.
ix. Promote transfer of technology from more developed countries.
 Disadvantages of privatization.
i. It increases consumer exploitation as they are profit motivated at the expense of
consumers and they overcharge or cheat them.
ii. Increases foreign control of the economy as most of the enterprises are sold to
foreign investors who may gain more economic powers in the country.
iii. Reduces provision of essential services and goods which are not profitable.
iv. Increases price fluctuations as entrepreneurs struggle to make more profits.
v. Results into over exploitation of resources leading to resource exhaustion.
vi. Leads to environmental degradation. This is because of the industrial activities of the
private firms which result into environment hazards like water and air pollution.
vii. Profit repatriations. Foreign investors tend to take back profits to their countries of
origin slowing down development process in the country.
viii. Leads to public resentment against government as many nationals as a way of selling
off vital state assets to benefit only governmental officials.

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 ix. Increases income inequality in the economy. State enterprises are being sold to few
rich investors who enjoy business benefits/profits as the rest become poorer.
x. Makes government planning difficult since it controls just a small portion of the
economy.
xi. Losses are incurred due to under valuation at the sale of the state enterprises.
xii. Leads to wasteful competition as firms produce more or less the same products
leading to duplication of products.
Factors limiting the process of privatization.
Opposition from the public and politicians for fear of loss of economic control and political
reasons.
Low level of entrepreneurship. Which makes it difficult to get local buyers?
Undeveloped capital and money market. This makes it difficult for the enterprises to be sold
the general public but to foreign investors.
General poverty in low developed countries with very few people capable of buying shares in
public enterprises.
High cost of privatization process eg Advertising costs, valuation, and renovation.
Corruption and embezzlement with in the privatization unit which leads to loss of funds
generated from the privatization.
Political instability in some parts of the country scare away private investors in the country
especially the foreign investors.
Poor valuation of the public enterprises leading to sale at a give away price.
Small domestic market in developing countries also scare prospective investors.
Poor state of public enterprises due to mismanagement scare potential buyers of the public
enterprises.
Unwillingness to run joint ventures with the government due to lack of trust and illiteracy.
Existence of Unscrupulous buyers

Some sample questions;

Some sample questions.

1. a. Define sole trade

b. Outline the advantages and disadvantages of sole proprietorship.

2. i. Explain why most forms of businesses are sole traders.

ii. Outline the problems faced by sole traders in Uganda.

3. Explain the differences between sole trade and partnership business.

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 4. a. Define partnership.
b. Outline the features of partnership business.
c. What are the advantages of partnership business?
5 a. Define a partnership deed.

b . Outline the contents of a partnership deed.

c. Outline the problems faced by partnership businesses in Uganda.

 a. Outline the contents of the partnership act.

b. What are the disadvantages of a partnership business?

C. Why are most professional firms interested in forming partnership businesses?

6 a. Outline the rights and duties of partners.

b. Explain the circumstances under which a partnership business may be dissolved.

7. a. Distinguish between the following types of partners;
i. Active and dormant partner
ii. Real and quasi partner
iii. Limited and general partner

b. Explain the differences between partnership and joint stock companies.

8 a. Define stock exchange.

b. Explain the role of the following in stock exchange;

i. Jobbers ii. Brokers iii. Bulls iv Bears v. stags

9 a. Explain the role played by stock exchange in the development of a country.

b. What problems are faced by stock exchange markets.

10 a Distinguish between quoted and unquoted companies.

b Give reasons for a company getting quoted.

c Explain the types of securities sold at stock exchange.

11a. Give reasons why government should be involved in business

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 b. Explain any three ways in which government is involved in business today.

12. a. Explain the advantages of public/government enterprises.

b. Despite the advantages why is the government selling it enterprises?

13. a. Differentiate between direct and indirect tax.

b. Other than taxation give any five sources of government revenue.

c. Explain any five ways in which the government supports the private sector

14. a. Define consumer protection.

b. Give reasons why the government should protect consumers

c. Explain any five methods used by the government to protect consumers.

15.a. Explain any five differences between public corporations and public limited companies

b. Explain any five ways in which the government controls the private sector.

16a. Give reasons why government should be involved in business

b. Explain any three ways in which government is involved in business today.

17 . a. Explain the advantages of public/government enterprises.

b. Despite the advantages why is the government selling it enterprises?

18. a. Differentiate between direct and indirect tax.

b. Other than taxation give any five sources of government revenue.

c. Explain any five ways in which the government supports the private sector

19a. Define consumer protection.

b. Give reasons why the government should protect consumers

c. Explain any five methods used by the government to protect consumers.

20a. Explain any five differences between public corporations and public limited companies

b. Explain any five ways in which the government controls the private sector.

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Chapter 4. BUSINESS CALCULATIONS
a. IMPORTANCE OF BUSINESS CALCULATIONS:
1. They assist in calculating profit i.e. gross profit and net profit.
2. They also assist a business man in ascertaining the financial stand of the business i.e. value of
assets, liabilities and net worth of the business.
3. They are used as tools for control of business assets and costs.
4. They are used as a basis to make decisions for example investment, withdraw or expand
business.
5. They are used to compare business performance in different periods i.e. one year with another.
6. They are used to show business trend over time.
7. They are used to compare performance of one business with other businesses or branches of the
same business.
8. They are a basis of taxation by the government for example to compute tax based on profits of
the business.
9. They are used as a basis for credit dealings e.g. banks,or financial institutions to consider the
profitability or financial stand of the business to give loans
b. Financial stand of a business.
The financial stand of a business is expressed in a balance sheet.

BALANCE SHEET:

 A balance sheet is a financial statement showing assets, liabilities and net worth/capital of the
business as at a given date.
 It is a statement showing the financial stand of the business as at a given date.
 A balance sheet is an equation of:
Assets = Liabilities + Capital
This equation is thus called the balance sheet equation or financial equation.

ASSETS: These are properties owned by a business e.g. buildings, land, furniture, cash at bank, cash
in hand, stock, un received income, vehicles, premises, fixture and fittings, advance payments e.t.c.

Assets = Capital + Liabilities.

Total assets = Fixed assets + Current assets.

FIXED ASSETS:

These are properties that stay with the business for a long time of more than a year e.g. land, buildings,
furniture, vehicles, machinery, tools, premises, furniture and fittings, Good will.

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Fixed assets are properties bought for use in a business not for resale. Good will of a business is the
reputation a business acquires over time. It is the most fixed asset but invisible /fictitious only felt by
the number of customers, in profits ascertained by a business.
Fixed Assets = Total assets – Current assets.
CURRENT ASSETS:
These are properties that stay with the business for a short period of less than a year. They include,
stock, debtors, cash at bank, cash in hand, unreceived income, .e.g. un received rent, advance payments
such as wages in advance.
Current assets = Total assets – Fixed assets.
N.B: Debtors are people who owe money to the business.
LIABILITIES:
 These are debts of the business to outsiders.
 They are financial obligations of the business to outsiders’ .i.e. what the business has to pay to
outsiders as its liabilities e.g. bank loans, debentures, creditors, unpaid expenses, advance
income, bank over drafts e t c.
 Liabilities = Assets – Capital.
 Total liabilities = Long term liabilities + Current liabilities.
LONG TERM LIABILITIES:
These are debts to be paid by the business to outsiders after a long period of more than a year e.g. bank
loans and debentures.
Long term liabilities = Total liabilities – Current liabilities
= Bank loans + Debentures
CURRENT LIABILITIES:
They are debts to be paid by the business to outsiders within a short period of less than a year. They
include creditors, un paid expenses like un paid electricity e t c, advance income e.g. advance rent,
bank over draft.
Current liabilities = Total liabilities – long term liabilities.
N.B: Creditors are people to whom money is owed by the business.
CAPITAL:
It is defined in different ways depending on the person defining it in business calculations.
(i) Capital is money invested by the owner to a business .i.e. capital invested.
(ii) Capital is money that the owner claims from the business .i.e. capital owned or owner’s equity.
(iii) It is net assets of the business or net worth of the business .i.e.
(iv) Capital = Assets – Liabilities.
Capital can be called: Capital owned, Capital invested, Net worth or net assets or Equity of a business.
For a running business net profit increases CapitaLand drawings reduce capital hence
 Net worth/equity = Gross capital + Net profit – Drawings.
DRAWINGS. They are goods or cash withdrawn from the business by the owners for personal
use. Drawing reduce the capital owned while net profit increase the capital owned.
BORROWED CAPITAL: This is the value of long term liabilities of a business.

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 Borrowed capital = Long term liabilities
= Bank loan + Debentures.
LIQUID CAP I TAL
This is the value of assets that can easily be converted into cash. It is the value of current assets
without stock e.g. debtors, cash at bank, cash at hand, un received income and advance payments.
Liquid capital (Assets) = Current assets – Stock.
Current assets – Stock Liquid assets
Liquid capital ratio = or
Current Liability Current liabilities
FIXED CAPITAL It is the value of fixed assets .i.e. capital tied up in fixed assets
 Fixed capital = Fixed assets
CIRCULATING CAPITAL:/ Floating capital; it is the value of current assets of a business.
WORKING CAPITAL
It is the money used in the day to day running of a business e.g. buying stock, paying rent, transport,
wages and salaries e t c. it is the excess of current assets over current liabilities. It is the most important
part of capital in a business without which there will be no business carried on.
Working capital = current assets - current liabilities.
Working capital ratio/current asset ratio or current ratio. It is the ratio of current assets to current
liabilities.
Current asset
 Working capital ratio = .
Current liability
When the ratio is greater than one, it means that the business is solvent .i.e. it means that after paying
of the short term debts, the business is able to continue without and selling the fixed assets.
When the ratio is less than one .i.e. a fraction, it means that the business is insolvent. This implies that
after paying off the short term debts the business cannot continue effectively without selling fixed
assets.
OVER CAPITALISATION: This is when a business has too much working capital required by the
business to operate such hat part of it remain idle .
Over stocking. It when a business has too much stock such that some may never be sold and hence
become dead stock.
SOLVENCY:
This is when business assets are more than the liabilities. The business is solvent. It means that it has
capital and that it can continue operating after paying of the liabilities (debts) without further
borrowing.
Insolvency: This is when business liabilities are more than its assets. It means that after paying the
debts the business cannot operate without further borrowing. An insolvent business is one that can
easily be bankrupted.
BANKRUPTCY: This is in ability of a business to pay its debts as declared by courts of law.

CAPITAL EMPLOYED/NET CAPITAL EMPLOYED:

 It is the value of fixed assets and working capital.
.i.e. Capital employed = Fixed assets + Working capital

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 = Fixed assets + Current assets – Current liabilities
= Assets – Current liabilities
= Borrowed capital + Capital owned
Gross capital employed is the value of Total assets of a business.
Gross capital employed = total assets.
Hence;
Equity capital/ capital owned = Gross capital employed – Current liabilities .

Sources of business capital;

i. Personal savings eg purchase of property which is later sold, or and keeping cash in
bank etc.
ii. Borrowing from friends or relatives.
iii. Borrowing from financial institutions. or banks
iv. Donations ,gifts or prizes,
v. Credit purchases/supplies from other traders or producers.
vi. Grants from government/subsidies eg Entandikwa scheme’.
vii. Sale of debentures especially public limited companies.
viii. Taxation in case of government enterprises.
ix. Profits when ploughed back in business.

Illustrations
1. The following records were available at the end of the year 2013. Shs.
Opening stock
70,000
Closing stock 100,00
0
Un paid electricity
80,000
Debtors 120,00
0
Creditors 110,00
0
Buildings 920,00
0
Tools
72,000
Debentures 150,00
0
Machinery 390,00
0
Cash at bank 190,00
0
Cash in hand

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 18,000
Bank loan 300,00
0
Calculate:
(i) Assets
(ii) Liabilities
(iii) Capital owned
(iv)Working capital
(v) Fixed capital
(vi)Borrowed capital
(v)Capital employed
SOLUTION:
(i) Assets = Closing stock + Debtors + Buildings + Tools + Machinery + Cash at bank +Cash in hand.
= 100,000 + 120,000 + 920,000 + 72,000 + 390,000 + 190,000 + 18,000.
= shs.1, 810,000
(ii) Liabilities = Un paid electricity + Creditors + Debentures + Bank loan
= 80,000 + 110,000 + 150,000 + 300,000
= shs.640, 000
(iii) Capital owned = Assets – Liabilities
= 1,810,000 – 640,000
= shs.1, 170,000
(iv)Working capital = Current assets – Current liabilities
Current assets = Closing stock + Debtors + Cash at bank + Cash in hand
= 100,000 + 120,000 + 190,000 + 18,000
= shs.428, 000
Current liabilities = Creditors + Unpaid electricity
= 110,000 + 80,000
= shs.190, 000
Working capital = 428,000 – 190,000
= shs.238, 000
(v) Fixed capital = Fixed assets
= Buildings + Tools +Machinery
= 920,000 + 72,000 + 390,000
= shs.1,382,000
(vi)Borrowed capital = Long term liabilities
= Debenture + Bank loan
= 150,000 + 300,000
= shs.450, 000
vii) Capital employed = Fixed assets + Working capital
= 1,382,000+ 238,000
= shs1,620,000

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2. The balance sheet is of Masetu & Sons as at 31December 2012
BALANCE SHEET
Liabilities Assets
shs shs
Capital 9,500,000
Long term liabilities Fixed assets
Bank loan 4,000,000 land 1,500,000
Debentures 3,500,000 buildings 3,200,000
Vehicles 7,000,000
Fixtures & fittings 800,000
Current liabilities Current assets
creditors 4,200,000 stock 4,000,000
un paid wages 800,000 debtors 1,500,000
Rent un received 400,000
Cash at bank 2,000,000
Cash in hand 1,600,000
22,000,000 22,000,000
Calculate:
(i) Capital owned (iv)Working capital ratio
(ii) Working capital (v) Borrowed capital
(iii) Liquid capital (vi)Capital employed
SOLUTION
(i) Capital owned = Assets – liabilities
Assets = land + buildings + vehicles + fixture & fittings + stock + debtors + rent unreceived
. + cash at bank + cash in hand
= 1,500,000 + 3,200,000 + 7,000,000 + 800,000 + 4,000,000 + 1,500,000 + 400,000 +
2,000,000+1,600,000
= shs.22, 000,000
Liabilities = Bank loan + debenture + creditors + unpaid wages
= 4,000,000 + 3,500,000 + 4,200,000 + 800,000
= shs12, 500,000
:. Capital owned=22,000,000-12,500,000
=shs 9,500,000
(ii) Working capital = current assets – current liabilities
Current assets = stock + debtors + rent un received + cash at bank + cash in hand
= 4,000,000 + 1,500,000 + 400,000 + 2,000,000 + 1,600,000
= shs.9, 500,000
Current liabilities = creditors + un paid wages
= 4,200,000 + 800,000
= shs.5, 000,000
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 Working capital = 9,500,000 – 5,000,000
= shs.4, 000,000

(iii) Liquid capital = current assets – stock

= 9,500,000 – 4,000,000
= shs.5, 500,000
Or
Liquid capital = Debtors + Rent unreceived + Cash at bank + Cash in hand
= 1,500,000 + 400,000 + 2,000,000 + 1,600,000
= shs.5, 500,000

Current assets
(iv)Working capital ratio =
current liabilities
9,500,000
=
5,000,000
= 1.9 or = 19:10
(v) Borrowed capital = long term liabilities
= Bank loan +Debentures
= 4,000,000 + 3,500,000
= shs. 7,500,000
(vi) Capital employed = Capital owned + Borrowed capital
= 9,500,000 + 7,500,000
= shs. 17,000,000
Or capital employed = Assets – Current liabilities
= 22,000,000 – 5,000,000
= shs. 17,000,000

3. Given that: Shs.

Fixed assets 420,000
Stock 100,000
Debtors 150,000
Creditors 120,000
Cash at bank 360,000
Cash in hand 140,000
Un paid rent 80,000
Long term liabilities 260,000
Calculate:
(i) Capital owned
(ii) Capital employed
(iii) Working capital
(iv) Liquid capital

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 (v) Liquid capital ratio
SOLUTION
(i) Capital owned = Assets – liabilities
Assets = Fixed assets + Current assets
Current assets = Stock + Debtors + Cash at bank + Cash in hand
= 100,000 + 150,000 + 360,000 + 140,000
= shs.750, 000
Assets = 420,000 + 750,000
= shs.1, 170,000
Liabilities = long term liabilities + current liabilities
Current liabilities = Creditors + Un paid rent
= 120,000 + 80,000
= shs.200, 000
Liabilities = 260,000 + 200,000
= shs.460, 000
Capital owned = 1,170,000 – 460,000
= shs.710, 000
(ii) Capital employed = Capital owned + Long term liabilities
= 710,000 + 260,000
= shs.970, 000
Or
Capital employed = Assets – current liabilities
= 1,170,000 – 200,000
= shs.970, 000
(iii) Working capital = current assets – current liabilities
= 750,000 – 200,000
= shs.550, 000
(iv)Liquid capital = current assets – stock
= 750,000 – 100,000
= shs.650, 000
Liquid assets
(v) Liquid capital ratio =
Current liabilities
650,000
=
200,000
= 3.25 or 13 : 4
c. CALCULATION OF PROFITS:
Profits are calculated at two levels;
a) Gross profit. b. Net profit
GROSS PROFIT
The difference between selling price and cost price.
Gross profit = Selling price – cost price.

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This formula implies that selling price is more than the cost price. Where the cost price is more than
the selling price gross profit is negative or it is a gross loss.
Gross loss = Cost price – Selling price..
The formula also implies that only one item is bought and sold. Where there are many items dealt in,
gross profit is the difference between net sales/ turns over and cost of sales.
Gross profit = Net sales - Cost of sales.
And Gross Loss = Cost of sales – Net Sales
NET SALES/TURN OVER:
It is the total of the selling prices for all goods sold in a business.
Net sales = Gross profit + cost of sales.
Where sometimes out of the goods sold to customers some of them are brought back to the business,
Also: Net sales = total sales – returns in wards
RETURNS IN WARDS/SALES RETURNS:
Also called sales returns, it is the value of goods brought back to the business by customers for several
reasons .e.g. being spoilt, not of the right order, expired e t c. they reduce total sales to get net sales.
Returns in wards/sales returns = Total sales – Net sales

COST OF SALES/COST OF GOODS SOLD/SALES AT COST:

It is the cost price for the goods actually sold. From the gross profit formula,
Cost of sales = Net sales – Gross profit or
Where it becomes difficult to physically count items sold at their cost price, the formula below applies;
Cost of sales = Opening stock + Net purchases – Closing stock.
OPENING STOCK:
It is the value of unsold goods at the beginning of the trading period. From cost of sales formula,
Opening stock = Cost of sales + Closing stock – Net purchases.
NET PURCHASES:
Purchases are goods bought for resale.
Net purchase is the difference between total purchases and the returns outwards.
Net purchases = Total purchases – Returns outwards
or from the cost of sales formula;
Net purchases = Cost of sales + Closing stock – Opening stock.
RETURNS OUT WARDS OR Purchase RETURNS:
It is the value of goods taken back to suppliers by the business for several reasons .e.g. being spoilt,
not of the order, expired, in excess e t c.
Returns out wards = Total purchases – Net purchases.
CLOSING STOCK:
It is the value of unsold goods at the end of the trading period. using the cost of sales formula;
Closing stock = Opening stock + Net purchases – Cost of sales.
COST OF GOODS AVAILABLE FOR SALE:
Cost of goods available for sale is the value of goods ready to be sold. It includes the value of Opening
stock and net purchases.
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Cost of goods available for sale = Opening stock + Net purchases.
Hence: Cost of sales = Cost of goods available for sale – Closing stock.
NET PROFIT:
It is net income for the business man. It is what the business man wishes to get in running the
business. It is the difference between gross profit and the total expenses of the business.
Net profit = Gross profit – expenses.
Where a business gets some other incomes outside trading,
. Gross profit = Gross income – Expense.
Gross income = Gross profit + Other incomes.
Other incomes to the business is income not from original/formal business activities (buying &
selling of goods or services) .e.g. rent income/received, commission received interest received e t c.
In case the expenses are more than the gross profit /gross income, it is a net loss.
Net loss = Expenses - Gross profit/income
Expenses reduce gross profit. But they increase gross loss to get Net loss.
Net loss = Gross loss + expenses.
EXPENSES:
These are costs incurred in the course of running business. They reduce gross profit/income to get net
profit e.g. electricity, wages and salaries, transport, water, rent, depreciation, bad debts, advertising,
insurance, interest on loan e t c.
They are also called overhead costs, indirect expenses, administrative expenses or selling and
distribution expenses.
Expenses = Gross profit – Expenses.

DIRECT EXPENSES:
These are costs which increases the value of cost of goods available for sale .e.g. carriage in wards,
purchases wages e t c.

INCOME STATEMENT/TRADING AND PROFIT LOSS ACCOUNT:

It is a financial statement in which profits are calculated .i.e. Gross profit and Net profit. It is also
called trading, and profit and loss account. It therefore has two parts.
(i) Trading account: It is part of an income statement in which gross profit is calculated.
(ii) Profit and loss account: It is part of the income statement in which net profit is calculated.
USES OF NET PROFIT:
 To be used by the business man to meet his/her personal needs for example paying school fees,
to buy food e t c.
 To be used by a business man to increase his capital when ploughed back into the business.
 To be used to start another business.
 To be used to buy personal fixed assets e.g. personal car, land, furniture, house e t c.
 To meet personal social responsibilities eg. sponsoring needy people, etc.
WAYS OF INCREASING PROFITS IN A BUSINESS:
 Increasing sales through use of all forms of sales promotion.
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  Reducing costs in business e.g. reducing wages by laying off some workers etc.
 Close and effective monitoring of business activities to reduce wastage of resources e.g. stock
control to reduce on theft of stock.
 Increasing prices of goods especially with monopolists.
 Increasing capital base to offer a variety of stock.
4. ILLUSTRATION:
Given the following records at the end of the year 2013. shs
Opening stock 50,000
Closing stock 45,000
Purchases 210,000
Returns out wards 10,000
Sales 730,000
Returns in wards 110,000
Expenses 150,000
(a) Calculate:
(i) Net sales/turnover
(ii) Cost of sales
(iii) Gross profit
(iv) Net profit
(b) Prepare an income statement for the business.
(i) Net sales = Sales – Returns in wards
= 730,000 – 110,000
= shs.620, 000
(ii) Cost of sales = Opening stock + Net purchases – Closing stock
Net purchases = Purchase - Returns out wards
= 210,000 – 10,000
= shs.200, 000
Cost of sales = 50,000 + 200,000 – 45,000
= shs.205, 000
(iii) Gross profit = Net sales (Turnover) – Cost of sales
= 620,000 – 205,000
= shs.415,000
(iv) Net profit = Gross profit – Expenses
= 415,000 – 150,000
= shs.265,000
c. INCOME STATEMENT
FOR THE YEAR ENDED 31ST DECEMBER,2013
Shs shs shs.
Net sales
Sales 730,000
Less: Returns in wards 110,000 620,000
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 Less: Cost of sales
Opening stock 50,000
Add Net purchases
Purchases 210,000
Less: Returns out wards 10,000 200,000
Cost of goods available for sale 250,000
Less: closing stock 45,000 205,000
Gross profit 415,000
Less: Expenses 150,000
Net profit 265,000

STOCK:
It is the value of unsold goods in a business. The value of stock is ascertained by stock taking and
stock valuation.
STOCK TAKING: It is the physical counting and making a list of the unsold goods in a business at
a particular time.
STOCK VALUATION:
It is getting the value of unsold goods as at a given date which is either at cost price or selling price
which even is lower.
Stock taking and valuation can be done any number of times as per the wish of the business man.
AVERAGE STOCK:
It is the value of total stock per the number of times stock is taken .i.e.
Total stock
Average stock =
Number of ×stoc k is taken
opening stock +Closing stock
Where stock is taken twice average stock = ; hence
2
Opening stock = (2 Average stock) – closing stock
Closing stock = (2 Average stock) – opening stock

 Mark up and margin

These are gross profit expressed as a percentage of cost of sales or net sales.

MARK UP: (Gross Profit Percentage at cost).

This is gross profit expressed as a percentage of cost of sales/Cost price.
Gross profit
Mark up = x 100.
Cost of sales
HENCE
Gross profit = Mark up x cost of sales
Gross profit
Also cost of sales = .
Mark up

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MARGIN/GROSS PROFIT PERCENTAGE/GROSS PROFIT RATIO
This is gross profit expressed as a percentage of net sales or turn over.

Gross profit
 Margin = sales/Turn x 100
Net ¿ ¿
Hence
 Gross profit = margin x net sales
And
Grosss profit
 Turn over/net sales =
Margin
ILLUSTRATION
Getting margin from mark up;
1
Margin =
Mark up+1
ILLUSTRATION.5
Given that mark up is 25%. Calculate margin
1
Margin =
Mark up+1
Mark up = 25%
25
=
100
1
=
4
1
Margin =
4+ 1
1
=
5
1
= x 100
5
= 20%
Getting mark up from margin
1
Mark up =
Margin−1
N.B: Subtract the numerator for the margin. If the numerator is 2, subtract 2 e.g. (Margin -2) etc.
ILLUSTRATION: 6
Given that margin is 20% calculate, mark up.
Margin = 20%
20
=
100
1
=
5

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 1
Mark up =
5−1
1
=
4
1
= x 100
4
= 25%
Calculation of cost of sales and net sales using the margin and mark up .i.e.
a. Given net sales and markup, cost of sales can be got by;
100 X Net sales
Cost of sales = hence,
100+ Mark up
b. Given cost of sales and markup, net sales can be got by;
Cost of sales (100+mark up)
Net sales/Turn over =
100
c. Given the cost of sales and margin, net sales can be got by,
Cost of sales X 100
Net sales =
100−margin
d. Given net sales and margin, cost of sales can be got by;
netsales (100−margin)
Cost of sales =
100
ILLUSTRATION 7
(i) Given that net sales shs.600, 000 and mark up is 20%. Calculate cost of sales.
100 X Net sales
Cost of sales =
100+ margin
100 X 600,000
Cost of sales =
100+20

100 X 600,000
=
120
= shs.500, 000
(ii) Given that the cost of sales is shs.750, 000 and mark up is 25%. Calculate Net sales.
Cost of sales (100+mark up)
Net sales =
100
750,000(100+25)
=
100
750,000(125)
=
100
= shs.937, 500
ILLUSTRATION 8
Given that cost of sales is shs.750, 000 and margin 25%. Calculate the net sales.

131
 Cost of sales X 100
Net sales =
100−margin
750,000 X 100
=
100−25
750,000 X 100
=
75
= shs.1, 000,000
Given that the net sales is shs, 1,500,000 and margin is 25%. Calculate cost of sales.
Net sales(100−margin)
Cost of sales =
100
1,500,000(100−25)
Cost of sales =
100
1,500,000 X 75
=
100
= shs.1, 125,000
Calculation of cost of sales and net sales using percentage methods.
Note; Given the margin it means the base for setting the profit is the net sales hence it is 100% . eg.
Given that cost of sales is shs.800, 000 and margin is 20%. Calculate net sales/turnover.
Net sales/Turn over = Cost of sales + Gross profit
Net sales = 100%
Gross profit = 20%
Cost of sales = 80%
80% = shs.800, 000
800,000
100% = X 100
80
= shs.1, 000,000
It is possible to use an un known,
As;
Net sales = Cost of sales + Gross profit .
Let net sales be x
20
X = 800,000 + x
100
20
X- x = 800,000
100
100 x−20 x
100 x = 800,000
100
80 x 800,000 x 100
=
80 80
= shs. 1,000,0000
In case a mark up is given it means the cost of sales has been the basis of setting the percentage gross
profit. hence the cost of sales in terms of percentage is 100%. For example,

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Given that net sales are shs.1, 200,000 and mark up is 20%. Calculate the cost of sales.
Cost of sales = Net sales – Gross profit
Cost of sales = 100%
Gross profit = 20%
Net sales = 120%
120% = 1,200,000
1,200 ,00
100% = X 100
120
= shs.1, 000,000
Also. Using the unknown
Cost of sales = Net sales - Gross profit
Let cost of sales be y
20
Y = 1,200,000 - y
100
20
Y + y = 1,2000,000
100
100 y+ 20 y
= 1,200,000
100
120y = 1,200,000 x 100

1,200,000 x 100
Y =
120

= shs. 1,000,000

MEASURE OF PERFORMANCE OF BUSINESS

Performance of business is measured using any of the following:
(i) Rate of stock turn
(ii) Net profit percentage
(iii) Return on capital
RATE OF STOCK TURNOVER
This is the number of times a business replaces its stock in business e.i. the number of times stock is
bought by customers and replaced by the seller in the business.
Cost of sales
Rate of stock turn =
Average stock
This is when the stock valued cost price and is obvious.
Hence cost of sales = Rate of stock turn x Average stock.
Cost of sales
Average stock =
Rate of stock turn
where stock is valued at selling price,

133
 Net sales /Turnover
Rate of stock turn = hence
Average stock
Net sales = Rate of stock turn x Average stock
Net sales /Turnover
Average stock =
Rate of stock turn
To use either of this formula it must be stated that stock is measured and valued at selling price unlike
with the first formula valued stock is valued at cost.
Rate of stock turnover is expressed in terms of number of times hence the unit in “times”.
The greater the number of times in rate of stock turns the better the performance compared to one with
low rate.
NET PROFIT PERCENTAGE/Net profit ratio:
This is the ratio of net profit expressed as a percentage of the net sales/turnover.
Net profit x 100
Net profit percentage = Net sales ¿
¿
Hence ; Net profit = Net profit percentage x Net sales.
Net profit
Net sales =
Net profit ratio / percentage
The higher the net profit percentage the better the performance of the business.
RETURN ON CAPITAL.
Return on capital is net profit expressed as a percentage of capital owned/invested.
Net profit
Return on capital = X 100. hence
Capital
Net profit = Return on capital X capital
Net profit
Capital = .
Return on capital
This is the best measure used to show the performance of business. The performance is hence shown
as;
 Excellent , Good , Fair , or Poor depending on the objectives of the business and his capital
base.
The higher the percentage, the better the performance compared to a low percentage.
OTHER ILLUSTRATIONS:
1. Given that: Shs
Opening stock 90,000
Closing stock 120,000
Purchases 780,000
Returns out wards 60,000
Net sales 1,540,000
Returns in wards 100,000
Expenses 150,000
Creditors 400,000

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 Debtors 480,000
Cash at bank 800,000
Cash at hand 200,000
Fixed assets 600,000
Bank loan 450,000
(a) Calculate
(i) Capital owned
(ii) Working capital
(iii)Capital employed
(b) Get the value of
(i) Cost of sales
(ii) Turnover
(iii)Net profit
(iv)Return on capital
(v) Rate of stock turn
SOLUTION
(a) (i) Capital owned = Assets – Liabilities
Assets = Closing stock + Debtors + Cash at bank + Cash at hand + Fixed assets.
= 120,000 + 480,000 +800,000 + 200,000 + 600,000
= shs.2,200,000
Liabilities = Creditors + Bank loan
= 400,000 + 450,000
= shs.850, 000
Capital owned = 2,200,000 - 850,000
= shs. 1,350,000
(iii) working capital = Current assets – current liabilities
Current assets = Closing stock + debtors + cash at bank + cash at hand
= 120,000 + 480,000 + 800,000 + 200,000
= shs.1, 600,000
Current liabilities = Creditors
= shs.400, 000
W orking capital = 1,600,000 – 400,000
= shs.1, 200,000
(iv) Capital employed = Fixed assets + working capital
= 600,000 + 1,200,000
= shs.1, 800,000
(b) (i) Cost of sales = Opening stock + net purchases – closing stock
Net purchases = Purchases – returns outwards
= 780,000 – 60,000
= shs.720, 000
Cost of sales = 90,000 + 720,000 – 120,000
135
 = shs.690, 000
(ii) Turnover = Sales – returns in wards
= 1,540,000 – 100,000
= shs.1, 440,000
(iii) Net profit = Gross profit – Expenses
Gross profit = Turnover – Cost of sales.

= 1,440,000 – 690,000

= shs.750, 000

Net profit = 750,000 – 150,000

= shs.600, 000

Net profit
(iv) Return on capital = X 100
Capital owned

600,000
= x 100
1,350,000

= 44.444..

44%

Cost of sales
(v) Rate of stock turnover =
Average stock
Opening stock +closing stock
Average stock =
2
90,000+120,000
=
2
= shs.105, 000
690,000
Rate of stock turn =
105,000
= 6.57142
_ 7times

2. The balance sheet below is of Bata Company LTD as at 31.Dec.2014.

BALANCE SHEET
Liabilities shs Assets shs
Fixed assets
Capital 2,300,000 Land 1,800,000
Long term liabilities Machinery 900,000
Bank loan 1,670,000 vehicles 2,400,000

136
 Debentures 1,500,000 Current assets
Current liabilities Stock 640,000
Creditors 300,000 Debtors 460,000
Overdrafts 600,000 Cash at hand 170,000
6,370,000 6,370,000
Also: Opening stock was shs.300, 000, purchases shs.6, 300,000, returns out wards shs.1,100,000.
(a) Calculate ;
(i) Capital owned
(ii) Working capital
(iii) Fixed capital
(iv) Borrowed capital
(v) Capital employed

(b)Calculate

(i) Cost of sales

(ii) Average stock
(iii) Rate of stock turn

SOLUTION

(a) (i) Capital owned = Assets – Liabilities

Assets = land + machinery + vehicles + stock + debtors + cash at hand
= 1,800,000 + 900,000 + 2,400,000 + 640,000 + 460,000 +170,000
= shs.6, 370,000
Liabilities = bank loan + debentures + creditors + overdraft
= 1,670,000 + 1,500,000 + 300,000 + 600,000
= shs.4, 070,000
Capital owned = 6,370,000 – 4,070,000
= shs.2,300,000

(ii) Working capital = Current assets – current liabilities

Current assets = stock + debtors + cash at hand

= 640,000 + 460,000 + 170,000
= shs 1,270,000
Current liabilities = creditors +overdraft
= 300,000 + 600,000
= shs. 900,000
Working capital = 1,270,000 – 900,000
= shs 370,000
(iii) Fixed capital = Fixed assets
= land + machinery + vehicles

137
 = 1,800,000 + 900,000 + 2,400,000
= shs. 5, 100,000
( iv) Borrowed capital = long term liabilities
= bank loans + debentures
= 1,670,000 + 1,500,000
= shs.3, 170,000
(v ) Capital employed = fixed assets + working capital
= 5,100,000 + 370,000
= shs.5, 470,000
b. (i) Cost of sales = opening stock + net purchases – closing stock
Net purchases = purchases – returns out wards
= 6,300,000 – 1,100,000
= shs.5, 200,000
Cost of sales = 300,000 + 5,200,000 – 640,000
= 5,500,000,000 - 640,000
= shs.4, 860,000
N.B: Closing stock is the stock in the balance sheet. It is the asset.
Opening stock +Closing stock
(ii) Average stock =
2
300,000+640,000
=
2
940,000
=
2
= shs.470, 000
Cost of sales
(iv) Rate of stock turn =
Average stock
4,860,000
=
470,000
= 10.3404256319
10times
3. Given that: shs.
Opening stock 140,000
Closing stock 200,000
Purchases 700,000
Sales 1,400,000
Returns in wards 200,000
Expenses 250,000
Capital 1,600,000
Calculate:
(i) Cost of sales
(ii) Turnover

138
 (iii) Gross profit
(iv)Gross profit percentage (margin)
(v) Mark up
(vi)Rate of return on capital
(vii) Comment on business performance

SOLUTION

(i) Cost of sales = opening stock + net purchases – closing

= 140,000 + 700,000 – 200,000
= 840,000 - 200,000
= shs.640, 000
(ii) Turnover = Sales – Returns in wards
= 1,400,000 – 200,000
= shs.1, 200,000
(iii). Gross profit = Turnover – Cost of sales
= 1,200,000 – 640,000
= shs.560, 000
Gross profit
(iv) Gross profit percentage/Margin = x 100
Turnover
560,000
= x 100
1,200,000
= 46.6666
47%
Gross profit
(v) Mark up = x 100
Cost of sales
560,000
= x 100
640,000
= 87.5%
Net profit
(vi) Rate of return on capital = x 100
Capital
Net profit = Gross profit – expenses
= 560,000 – 250,000
= shs.310,000
310,000
Return on capital = x 100
1,600,000
= 19.375
~ 19%
(vii)The performance of business is fair because the percentage of return on capital is 19% which
is fair.

4. Given that shs.

139
 Opening stock 500,000
Closing stock 300,000
Cash at bank 800,000
Cash at hand 250,000
Debtors 180,000
Buildings 600,000
Vehicles 920,000
Tools 120,000
Bank loan 400,000
Debentures 600,000
Creditors 210,000
Un paid rent 150,000
Calculate:
a) Capital owned
b) Working capital
c) Capital employed
d) Liquid capital
e) Fixed capital
f) Borrowed capital
g) Working capital ratio
SOLUTION
a) Capital owned = Assets – liabilities
Assets = closing stock + cash at bank + cash at hand + debtors + buildings + vehicles + tools
= 300,000+800,000 + 250,000 +180,000 +600,000 +920,000 +120,000
= shs3,170,000
Liabilities = bank loan + debentures + creditors + unpaid rent.
= 400,000 + 600,000 + 210,000 + 150,000
= shs1,360,000
Capital owned = 3,170,000 – 1,360,000
= shs1,810,000
b) Working capital= current assets – current liabilities
Current assets = closing stock + cash at bank + cash at hand + debtors
= 300,000 + 800,000 + 250,000 + 180,000
= shs1,530,000
Current liabilities = Creditors + un paid rent
= 210,000 + 150,000
= shs360,000
Working capital = 1,530,000 + 360,000
= shs1,170,000
c) Capital employed = Assets – current liabilities
= 3,170,000 – 360,000
140
 = shs2,810,000
d) Liquid capital = current assets – closing stock
= 1,530,000 – 300,000
= shs1,230,000
e) Fixed capital = Fixed asset
= Buildings + Vehicles + Tools
= 600,000 + 920,000 + 120,000
= shs1,640,000
f) Borrowed capital = Long term liabilities
= Bank loan + debentures
= 400,000 + 600,000
= shs1,000,000
current assets
g) Working capital ratio =
current liabilities
1,530,000
=
360,000
= 4.191
4.2

5. The balance sheet of Mugolo & sons as at 31/12/14

Balance sheet
Liabilities shs Assets shs
Capital 8,000,000 Fixed assets
Land 3,600,000
Long term liabilities Buildings 4,200,000
Bank loan 4,500,000 Machinery 8,000,000
Debentures 4,300,000 current assets
Current liabilities Stock 1,500,000
Creditors 2,500,000 Debtors 1,200,000
Overdraft ,200,000 Cash at hand 1,000,000
19,500,000 19,500,000

Also opening stock shs1,300,000, net sales shs9,000,000 and net purchases shs4,800,000. If the
expenses were shs800,000.
(a) Calculate:
(i) Cost of sales
(ii) Average stock
(iii) Gross profit
(iv)Net profit
(b) Calculate:
(i) Capital owned

141
 (ii) Working capital
(iii) Return on capital

(a) (i) Cost of sales = opening stock + net purchases – closing stock
= 1,300,000 + 4,800,000 – 1,500,000
= shs4,600,000

opening stock +closing stock

(ii) Average stock =
2
1,300,000−1,500,000
=
2

2,800,000
=
2

= shs1,400,000

(iii) Gross profit = Net sales – cost of sales

= 9,000,000 – 4,600,000
= shs4,400,000

(iv) Net profit = Gross profit – Expenses

= 4,400,000 – 800,000
= shs3,600,000
(b) (i) Capital owned = Assets – Liabilities
Assets = land + buildings + machinery + stock + debtors + cash at hand
= 3,600,000 + 4,200,000 + 8,000,000 + 1,500,000 + 1,200,000 + 1,000,000
= shs19,500,000
Liabilities = bank loan + debentures + creditors + overdraft
= 4,500,000 + 4,300,000 + 2,500,000 + 200,000
= shs11,500,000
Capital owned = 19,500,000 – 11,500,000
= shs8,000,000
N.B: This value is the same as the capital in the balance sheet . But you must show the calculation.
(iii)Working capital = Current assets – Current liabilities
Current assets = Stock + Debentures + Cash at hand
= 1,500,000 + 1,200,000 + 1,000,000
= shs. 3,700,000
Current liabilities = Creditors + Overdraft
= 2,500,000 + 200,000
= shs2,700,000
Working capital = 3,700,000 – 2,700,000

142
 = shs 1,000,000.
6. The following records relate to Mutebe and family as at 31st Dec, 2014.
shs
Opening stock 180,000
Closing stock 240,000
Purchases 760,000
Returns out wards 40,000
Sales 1,082,000
Returns in wards 12,000
Expenses 140,000
Capital 1,200,000
Calculate:
(i) Cost of sales
(ii) Net sales/turnover
(iii) Gross profit
(iv) Net profit
(v) Rate of stock turn
(vi) Return on capital
(vii) Margin
SOLUTION:
(i) Cost of sales = Opening stock + Net purchases – Closing stock
Net purchases = purchases – returns out wards
= 760,000 – 40,000
= shs720,000
Cost of sales = 180,000 + 720,000 – 240,000
= shs660,000
(ii) Net sales/turnover = Sales – Return in wards
= 1,082,000 – 12,000
= shs1,070,000
(iii) Gross profit = Turn over – Cost of sales
= 1,070,000 – 660,000
= shs410,000
(iv)Net profit = Gross profit – Expenses
= 410,000 – 140,000
= shs270,000
Cost of sales
(v) Rate of stock turn =
Average stock
opening stock +closing stock
Average stock =
2
180,000+240,000
=
2

143
 420,000
=
2
= shs210,000
660,000
Rate of stock turn =
210,000
= 3.14286
3 times
Net profit
(vi)Return on capital = X 100
Capital owned
2700 , 00
= X 100
1,200,000
= 22.5%
net profit
(vii) Return on capital = X 100
capital
270,000
= X 100
1,200,000
= 22.5%
gross profit
(viii) Margin = X 100
turnover /netsales
410,000
= X 100
1,070,000
= 38.317
38%

7. Given that shs

Opening stock 120,000
Closing stock 150,000
Net sales 1,780,000
Expenses 200,000
Capital 1,800,000
Rate of stock turn 8
Calculate:
(i) Average stock
(ii) Cost of sales
(iii) Gross profit
(iv)Net profit
(v) Margin
(vi)Rate of return on capital

SOLUTION:

144
 opening stock +closing stock
(i) Average stock =
2
120,000+150,000
=
2
270,000
=
2
= shs135,000
(ii) Cost of sales = Average stock X rate of stock turn
= 135,000 X 8
= shs1,080,00
(iii) Gross profit = Net sales – cost of sales
= 1,780,000 – 1,080,000
= shs700,000
Gross profit
(iv)Margin = X 100
Net sales
700,000
= X 100
1,080,000
= 64,814
65%
Net profit
(v) Rate of return on capital = X 100
Capital
500,000
= X 100
1,800,000
= 27.7777
28%
8. Given that shs.
Opening stock 150,000
Net purchases 680,000
Average stock 140,000
Gross profit at cost 20%
Expense 80,000
Capital 720,000
Calculate:
(i) Closing stock
(ii) Cost of sales
(iii) Gross profit
(iv) Net profit
(v) Return on capital
(vi) Net sales
(vii) Rate of stock turn
SOLUTION:

145
 (i) Closing stock = 2(Average stock) – Opening stock
= 2(140,000) – 150,000
= 280,000 – 150,000
= shs130,000
(ii) Cost of sales = Opening stock + Net purchase – Closing stock
= 150,000 + 680,000 – 130,000
= shs700,000
(iii) Gross profit = Mark up X Cost of sales
20
= X 700,000
100
= shs140,000
(iv) Net profit = Gross profit – Expenses
= 140,000 - 80,000
= shs60,000
Net profit
(v) Return on capital = X 100
Capital

60,000
= X 100
720,000
= 8.3333
8%
(vi)N et sales = Cost of sales + Gross profit
= 700,000 + 140,000
= shs 840,000

Cost of sales
(vii) Rate of stock turn =
Average stock
700,000
=
140,000
= 5 times.
9. Given that shs
Closing stock 200,000
Rate of stock turn 6
Cost of sales 840,000
Gross profit 20%
Expenses 120,000

Calculate:
(i) Average stock
(ii) Opening stock
(iii) Turnover

146
 (iv)Net profit
(v) Markup
SOLUTION:
Cost of sales
(i). Average stock =
Rate of stock turn
840,000
=
6
= shs140,000

(ii).Opening stock = 2(Average stock) – Closing stock

= 2(140,000) – 200,000
= 280,000 – 200,000
= shs80,000
cost of sales X 100
( iii). Turnover =
100−margin
840,000 X 100
=
100−20
840,000 X 100
=
80
= shs1,050,000
Or Turn over = cost of sales + gross profit
Let turnover be x
20
x = 840,000 + x
100
x 20 x
- = 840,000
1 100
100 x 20 x 840,000 X 100
100 x =
100 80
= shs1,050,000
(iv). Net profit = Gross profit - Expenses.
Gross profit = Turn over – cost of sales
= 1,050,000 – 840,000
= shs210,000
Net profit. = 210,000 – 120,000
= shs. 90,000
gross profit
(v) mark up = x 100
cos t of sales
210,000
` = x 100
840,000
= 25%

147
10. Given that shs.
Opening stock 170,000
Closing stock 108,000
Cost of sales 960,000
Net profit 130,000
Gross profit 25%
Calculate:
(i) Average stock
(ii) Rate of stock turn
(iii) Net sales
(iv)Net profit percentage
(v) Net purchase
(vi)Expenses
SOLUTION:
Opening stock +Closing stock
(i) Average stock =
2
170,000+108,000
=
2
278,000
=
2
= shs139,000
cost of sales
(ii) Rate of stock turn =
average stock
960,000
=
139,000
= 6.9064748
7 times
cost of sales X 100
(iii) Net sales =
100−margin
960,000 X 100
=
100−25
960,000 X 100
=
75
= shs1,280,000

OR. Using percentage method:

Net sales = Cost of sales + Gross profit
Net sales = 100%
Gross profit = 25%
Cost of sales = 75%
75% = 960,000

148
 960,000
100% = X 100
75
= shs1,280,000
Or
Net sales = Cost of sales + gross profit
Let net sales be x
25
x = 960,000 + x
100
x 25
- x = 960,000
1 100
100 x −25 x
100 x = 960,000 x 100
100
960,000 X 100
75x =
75
x = shs1,280,000

Net profit
(iv) Net profit percentage/Net profit ratio = X 100
Net sales
130,000
= X 100
1,280,000
= 10.15625
10%

(v) Net purchase = Cost of sales + Closing stock – Opening stock

= 960,000 + 108,000 – 170,000
= shs898,000
(vi) Expenses = Gross profit – net profit
20
Gross profit = of sales
100
20
= X 1,280,000
100
= shs320,000
Expenses = 320,000 – 130,000
= shs190,000

11. Given that shs.

Opening stock 720,000
Average stock at selling price 900,000
Gross profit at cost 20%
Rate of stock turn 6
Expenses 15%

149
Capital 6,000,000
Calculate:
(i) Net sale
(ii) Cost of sales
(iii) Closing stock
(iv)Net purchases
(v) Margin
(vi)Return on capital
SOLUTION:
(i) Net sales = Average stock x Rate of stock turn
= 900,000 x 6
=shs5,400,000
(ii) Cost of sales = Net sales – gross profit
Let cost of sales be x.
20
X = 5,400,000 - x
100
x 20
+ x = 5,400,000
1 100
100 x +20 x 5,400,000 X 100
100 X =
100 120
= shs. 4,500,000
Or
Net sales X 100
Cost of sales =
100+markup
5,400,000 X 100
=
100+20
5,400,000 X 100
=
120
= shs4,500,000
Or Using percentage method
Cost of sales = net sales – gross profit
Cost of sales = 100%
Gross profit = 20%
120% = 5,400,000
540,000 X 100
100% =
120
= shs4,500,000
(iii) Closing stock = (2Average stock) – opening stock
= (2 x 900,000) – 720,000
= 1,800,000 – 720,000
= shs1,080,000

150
 (iv)Net purchase = Cost of sales + Closing stock – Opening stock
= 4,500,000 + 1,080,000 – 900,000
= shs4,680,000
Gross profit
(v) Margin = X 100
Net sales
Gross profit = Net sales – Cost of sales
= 5,400,000 - 4,500,000
= shs900,000
900,000
Margin = X 100
5,400,000
= 16.666
17%
Ntet profi
(vi) Return on capital = x 100
Capital
Net profit = Gross profit - Expenses
15
Expenses = x Net sales
100
15
= x 5,400,000
100
= shs. 810,000
Net profit = 900,000 – 810,000
= shs. 90,000
90,000
Return on capital = x 100
6,000,000
= 1. 5%
12. Alfunsi and Alifan have two similar businesses operating in Butansi trading centre. The
following records relate to both businesses for the year ended 31st Dec, 2013.
Alifunsi Alifan
Average stock at selling price 188,000 168,000
Rate of turnover 5 6
Average margin 20% 25%
Total expense 60,000 118,200
(a) Calculate for each firm:
(i) Turnover
(ii) Cost of sales
(iii) Gross profit
(b) Show which business did better in terms of net profit percentage.
SOLUTION:
(i) Turnover = average stock x rate of stock turn over
Alfunsi = 188,000 x 5
= shs940,000

151
 Alifan = 168,000 x 6
= shs1,008,000
(ii) Cost of sales = Turn over (100 – margin)
100
940,000 X (100−20)
Alfunsi =
100
940,000 X 80
=
100
= shs.752,000
1,008,000 X (100−25)
Alifan =
100
1,008,000 X 75
=
100
= shs. 756,000
(iii) Gross profit = Net sales/ turnover – cost of sales
Alifunsi = 940,000 – 752,000
= shs188,000
Alifan = 1,008,000 – 756,000
= shs252,000
Net profit
(iv) Net profit percentage = x 100
Net sales
Net profit = Gross profit – Expenses
Alifunsi = 188,000– 60,000
= shs128,000
128,000
Net profit percentage = x 100
940,000
= 13.617021277
14%
Alifan
Net profit = 252,000 – 118,200
= shs133,800
133800
Net profit percentage = x 100
1,080,000
= 12.888889
≈ 13%

Alifunsi’s business performed better because of that net profit percentage of 14% than
Alifan that had its net profit percentage of 13%.

13. Trading account of Alice as at 31st December, 2012.

Dr Trading account Cr

152
 Shs shs
Opening stock 48,000 Sales 240,000
Purchases 220,000 Returns on purchases 15,000
Returns on sales 20,000 Closing stock 140,000
Gross profit 107,000 _______
395,000 395,000

The following are her expenses, rent, shs10,000, votes 5000 and electricity 12,000.
(i) Average stock
(ii) Cost of sales
(iii) Rate of stock turnover
(iv)Net profit
(v) Margin
(vi)Markup
(vii)Turnover.
SOLUTION:
opening stock +closing stock
(i) Average stock =
2
48,000+ 40,000
=
2
= shs44,000
(ii) Cost of sales = opening stock + net purchases – closing stock
Net purchase = purchase – returns outward/return on purchase
= 220,000 – 15,000
= shs205,000
Cost of sales = 48,000 + 205,000 – 40,000
= shs213,000
cost of sales
(iii) Rate of stock turn =
average stock
213,000
=
44,000
= 4.8409090
5 times
(iv)Net profit = gross profit – expenses
Expenses = rent + rate + electricity
= 10,000 + 5,000 + 12,000
= shs27,000
Net profit = 107,000 – 27,000
= shs80,000
Gross profit
(v) Margin = x 100
Net sales

153
 Net sales = sales – returns in wards/returns on sale
= 240,000 – 20,000
= shs220,000
107,000
Margin = x 100
220,000
= 48.636
49%

gross profit
(vi)Markup = x 100
cost of sales
107,000
= x 100
213,000
= 50.234741784
50%
14. Given that shs.
Opening stock 150,000
Closing stock 120,000
Rate of stock turn 8
Margin 20%
Expenses 5%
Capital 1,500,000
Calculate:
(i)Average stock (ii) Cost of sales (iii)Markup (iv) Turnover
(v)Net profit (vi)Net profit percentage
c. Comment on the performance of the business using return on capital.
SOULTION:
opening stock +closing stock
(i) Average stock =
2
150,000+120,000
=
2
270,000
=
2
= shs135,000
(ii) Cost of sales = average stock x rate of stock turn
= 135,000 x 8
= shs1,080,000
1
(iii) Markup =
margin−1
margin = 20%
20
=
100

154
 1
=
5
1
Markup =
5−1
1
= x 100
4
= 25%
cost of sales X 100
(iv)Turnover =
100−margin
1,080,000 X 100
=
100−20
= shs1,350,000
Or Turnover = cost of sales + gross profit
Let turnover be x
20
x = 1,080,000 + x
100
1000 20 x
- = `1,080,000
1 100
100 x −20 x
100 X = 1,080,000
100
1,080,000 x 100
x =
80
= shs1,350,000
Or using percentage method:
Turnover = Cost of sales + Gross profit
Turnover = 100%
Gross profit = 20%
Cost of sales = 80%
80% = 1,080,000
1,080,000 x 100
100% =
80
= shs1,350,000
(v) Net profit = Gross profit – Expenses
Gross profit = Margin x Turnover
20
= x 135,000
100
= shs270,000
Expenses = 5% x Turnover.
5
= X 135,000
100
Net profit = 270,000 – 67,500

155
 = shs1 92,500
Net profit
(vi)Net profit percentage = x 100
Turnover
192,500
= x 100
1,350,000
= 14.259259
14%
Net profit
(c) Return on capital = x100
Capital
192,500
= x 100
1,500,000
= 12.833
13%
The business performance is fair as its return on capital is 13%
.
15. Given that shs
Opening stock 1,800,000
Purchase 260,000
Closing stock 120,000
Gross profit at cost 20%
Expenses 440,000
Calculate:
(i) Cost of sales
(ii) Turnover
(iii) Average stock
(iv)Rate of stock turnover
(v) Net profit/net loss
SOLUTION:
(i) Cost of sales = Opening stock + Net purchases – Closing profits
= 1,800,000 + 260,000 – 1,200,000
= shs860,000
(ii) Turnover = Cost of sales + Gross profit
20
= 860,000 + x 860,000
100
= 860,000 + 172,000
= shs1,032,000
Cost of sales (100+ Markup)
Or Turnover =
100
860,000 x(100+20)
=
100

156
 860,000 x 120
=
100
= shs1,032,000
Opening stock +Closing stock
(iii) Average stock =
2
1,800,000+1,200,000
=
2
3,000,000
=
2
= shs1,500,000
Cost of sales
(iv) Rate of turnover =
Average stock
860,000
=
1,500,000
= 0.57 times
(v) Net profit = Gross profit – Expenses
= 172,000 – 440,000
= shs(268,000)
Or Net loss = Expenses – Gross profit
= 440,000 – 172,000
= shs268,000
Sample questions:
1a. Define the following terms as used in commerce;
i. Assets
ii. liabilities
iii. capital
b Given the following records of molinga company limited for the year ended 31st December 2013.
shs.
Opening stock 130,000
Closing stock 160,000
Purchases 900,000
Cash at bank 2,560,000
Cash at hand 800,000
Land 4,000,000
Buildings 3,000,000
Bank loan 2,000,000
Creditors 400,000
Debtors 450,000
Sales 3,600,000
Debentures 1,600,000
Calculate;

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 i. cost of sales
ii. capital owned
iii. working capital
iv. liquid capital
v. borrowed capital
vi. capital employed
2.a. Differentiate the following terms as used in commerce;
i. Balance sheet and income statement
ii. Capital owned and capital employed
iii. Opening stock and closing stock
b. Given the following records of Makeke Enterprise for the year ended 31st December 2015.
shs.
Opening stock 80,000
Closing sock 120,000
Purchases 1,670,000
Returns outwards 70,000
Sales 2,890,000
Returns inwards 190,000
Expenses 180,000
Calculate;
vii. Net purchases
viii. net sales/Turn over
ix. cost of sales
x. Average stock
xi. Gross profit
xii. Net profit

3.a. Differentiate between;

i. Current assets and fixed assets.
ii. Current liabilities and long term liabilities
b. The balance sheet relates to Baraka Enterprises Limited.
Balance sheet

Liabilities shs Assets shs

Capital 4,000,000 Land 2,500,000
Bank loan 2,000,000 Buildings 1,800,000
Debentures 2,200,000 Vehicles 3,000,000
Creditors 800,000 Stock 400,000
Unpaid rent 400,000 Debtors 500,000
Cash at bank 1,500,000
________ Cash at hand 700,000
Total 9,400,000 Total 9,400,000
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calculate;
i. Total assets.
ii. Capital owned
iii. Working capital
iv. Capital employed
v. Fixed capital
vi. Liquid capital
vii. Borrowed capital
16. a. Distinguish between
i. Debtors and creditors.
ii. Gross profit and Net profit
iii. Turnover and cost of goods sold.
b. Given the following records; shs
Opening stock 700,000
Closing stock 800,000
Purchases 2,980,000
Gross profits 25%
Expenses 60,000
Capital 180,000
Calculate
i. Cost of sales
ii. Net sales
iii. Mark up
iv. Average stock
v. Rate of stock turn over
vi. Using Return on capital comment on the business performance.

5a. Distinguish between;

i. Solvency and Insolvency
ii. Bankruptcy and overstocking
b. The following records relate to Baraka enterprises limited.
Opening sock shs.360,000
Average stock at selling price shs. 480,000
Rate of stock turn 6
Expenses 120,000
Gross profit at cost 25%
Capital 2,000,000
Calculate; i. Closing sock ii. Net sales iii. Cost of sales iv. Net purchases
v. Net profit vi. Gross profit percentage vii. Return on capital.

159
6 a. Outline any four uses of business calculations to a business man.
b. Given that; shs.
Closing stock 480,000
Net purchase 2,960,000
Sales 3,800,000
Expenses 1,500,000
Gross profit 25%
Returns out wards 40,000
Calculate;
i. Cost of sales ii. Total purchases iii. Opening stock
iv. Cost of goods available for sale v. Average stock vii. Net profit /loss.

7.a. Give any four ways in which a business man can use net profit.
b. Given the following records of Bulolo Enterprises Limited for Two years,
2004 2006
shs. shs.
Average stock 180,000 240,000
Cost of sales 1,080,000 1,200,000
Gross profit at cost 20% 25%
Expenses 40,000 80,000
Closing stock 170,000 220,000
Calculate for each year;
i. Net sales ii. Net profit iii. Net profit percentage/Net profit ratio.
iv Net purchases.
ii. Using rate of stock turn state which year the firm performed better.

8 a. Differentiate between Mark up and Margin.

h. Outline any four sources of business capital.
i. Musisi and company Limited values stock at selling price. His outstanding stock as at
1st January was shs. 290,000, stock at 31st 2016 shs. 270,000, purchases for the year
was shs. 1,800,000, Return on capital 36%, Net profit 25%. Rate of stock turn 5times
Calculate;
i. Cost of sales. ii. Turn over iii. Gross profit
iv. Net profit. v. Capital.
9.a. Explains any four ways a trader can increase his/her profits.
b The following records relate to Masabe traders limited.
shs.
Fixed assets 2,900,000
Total assets 5,000,000
Bank loan 2,100,000
Capital 1,900, 000
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 Drawings 300,000
Creditors 400,000
Also, Purchases are shs. 2,000,000, Cost of sales shs. 3,600,000, Opening stock shs. 240,000,
Expenses shs. 50,000.
Calculate;
i. Total current assets. Iv. Gross profit.
ii. Capital employed Iv. Turn over
iii. Net profit
10. Given average stock at cost as shs 360,000. and Gross profit of 20% rate of stock turn 5times,
Expenses 5%.
calculate ,
i. Average stock at selling price iii. Selling price V. Markup
ii. Cost price iv. Net profit

11. a. Give any two uses of trade discount;

b Opening stock shs.400,000
Cost of sales shs 880,000
Rate of stock turn 4
Expenses shs 80,000
Gross profit shs.240,000
Calculate; i. Net sales ii. Average stock iii. Net purchases. iv. Net profit Ratio
v. mark up vi. Margin

Chapter. 5 AIDS TO TRADE

 MONEY AND BANKING

 MONEY

Money is anything that is generally accepted as a medium of exchange for goods, services, and
payment of taxes or debts. The commodity used as money does not need to be attractive but to be
generally accepted as a medium of exchange by the society.

 FORMS OF MONEY

1. Commodity money: These were articles which served as consumer goods and also as money. E.g.
coffee, soap etc. Most early forms of money were of this type . The disadvantages with this form of
money were;

- Some commodities like cattle or coal, were difficult to look after.

- Many commodities depreciated e.g cattle die

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 - Some commodities like iron bars, salt, coal, etc were heavy, costly and un safe to
transport .
- Some commodities like animals were indivisible.

2 Metallic currency/money: These were composed of metal bars and coins of precious metals like
iron, silver ,gold etc.

The advantages were ,that ;

- It was durable
- It was cherish able
- It was wanted for its own sake.
 Disadvantages
- It was easy to forge .It would be coated and mixed to form up something similar to
money.
- Some countries lacked them.
- Many countries encouraged the importation of them but discouraged their export.
- Metals are bulky and costly to transport.

3 Paper money: This was introduced to reduce the disadvantages of metallic money and meet
the growing needs of trade. The first paper notes were receipts issued by Goldsmith which were
later used as currency to settle debts and as medium of exchange .They were good for large
transactions while coins are best for small transactions.

4. Fiduciary issue: This is money which is backed by Government securities and not gold.
Originally money represented the value of gold one had especially with gold Smiths.

5. Legal tender: This is money which must be accepted as a medium of exchange when offered in
payment with in a particular country. Bank notes and coins are legal tender. cheques are not legal
tender but claim for money.

6. Token money: These are paper notes and coins whose face value as money is in excess of the
materials out of which they are made. Paper money to day is of this type.

7. Full bodied money: This money whose face value as money is equal to the value of the
commodity out which they are made. All earlier forms of money were full-bodied.

 Money supply

It is the stock 0f money circulating within the country. It consists of bank notes and coins, Bank
deposits in form savings, current and fixed deposits .The supply of money is determined by
authorities especially commercial banks, central bank and the government.

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  Demand for money.

This is the amount of money individuals need to hold in form of or near cash. Money is demanded for
what it is to buy but not for its own sake . i.e. it is derived demand. It is represented in different
forms i.e. motives.

 Transaction motive. This is money needed for day to day transactions of the business i.e. to
meet daily demands of a business . For petty cash purpose, pay bills etc.
 Precautionary motive; This money kept over and above what is required for normal
transactions but to meet unusual or un expected eventualities as they arise e.g. illness,
accidents etc.
 Speculative motive. This is cash needs as best way of making profits i.e. to buy goods when
their prices go down and to be sold when the price rises.
 FUNCTIONS OF MONEY

Money has the following functions

I. Measure of value. All goods and services are measured in terms of money.
II. Medium of exchange : when buying or selling ,goods and services are exchanged for money.
III. Store of value : it is the most convenient way of storing value for instance it can be kept for a
long period than other goods.
IV. Standard of deferred payment: it is used as a means of settling debts for goods or services
taken on credit.
V. Unit of account; all transactions are recorded in books of accounts in terms of money
 QUALITIES OF GOOD MONEY
I. Acceptability .It must be generally accepted as medium of exchange by society and general
public
II. Scarcity. it needs to be limited in supply so that people work for it
III. Portability; it should be less bulky to be able to be carried from one place to another without
being noticed
IV. Stability in value; it should not lose its value so easily in order to maintain its worth
V. Homogeneity/recognisability; All money i.e. paper note and coin of the same denomination
must be similar in all aspects.
VI. Divisibility ; should be capable of being divided into suitable units or denominations to enable
purchase of goods of different units i.e. small or large.
VII. Durability; it should last for long time i.e. materials used for making money should be long
lasting and does not depreciate easily with time.
VIII. Malleability; it should not be easy to forge or imitate
Question;

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 1a. Define money.
b. Outline the qualities of good money. c. what are the functions of money?

 BARTER TRADE

Barter trade is the exchange of goods for goods, services for service or goods for services

 Advantages of barter trade.

- A country is able to save the scarce foreign exchange to be used to purchase only essential
items
- It enables a country to easily get what she cannot produce through exchange.
- It does not involve complicated documentations therefore convenient.
- It creates international relationship/ understanding and peace among countries.
- It reduces wastage because surplus output can easily be exchanged for other goods.
 DISADVANTAGES OF BARTER TRADE
I. Lack of double co-incidence of wants ; it is difficult to get one who has what one wants to buy
and has what you want to buy.
II. Lack of measure of value. It’s difficult to measure the number of goods in terms of other
goods or services
III. Indivisibility ,large commodities are difficult to divide in small units to settle small debts
IV. Difficulty to transport. Some goods are no easy to move with especially bulky goods.
V. Lack of deferred payment due to change in value.
VI. Difficulties of storage as some goods are bulky and perishable.
Sample Question.
a. Distinguish between barter trade and Exchange
b. What can a country gain from barter trade?
c. What are the problems of barter trade?
 BANKING
Banking are activities involving accepting deposits, safeguarding them and making them
available to owners on demand and offering other financial services to the public like offering
credit facilities.
The early bankers were the gold smiths of London who accepted the gold and other
valuable, issued transferable receipts promising to repay the amount on demand .These
receipts served as money while the Gold Smiths started offering other functions of banks.
 TYPES OF BANKS
I. Savings banks.
These are banks mainly intended to provide safe place for keeping money and to promote the
habit of thrift among individuals e.g. post bank( post office savings banks).They offer mainly
saving account

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 II. Merchant banks
These were banks founded by traders especially oversea traders. They offer all types
of accounts like commercial banks i.e. saving , current and fixed deposit account. They are
whole sale banks i.e. deal mainly in large sums of money / deposits and for long terms .The
customers are financial institutions , companies and individuals with large sums of money.
III. Specialized banks.
These are banks which serve special customers and provide special type of services e.g.
former co-operative banks which serve co-operatives societies, Uganda development
banks(UDB),African Development Bank(ADB).
IV. Commercial Banks
These are banks which offer a wide variety of banking services and are of particular
importance to business men. They are owned by shareholders and run as joint stock
companies. E.g. Bank of Baroda, Stanbic Bank etc They offer all types of accounts.
V. The central Bank
This is a financial institution started and operated by government to control, guide and assist
other financial institutions in the country. It provides banking services, financial advice to the
government and is the main channel through which the government executes its monetary
policies.
Every country has one central bank called by its name .e.g. bank of Uganda, bank of Kenya.

 FUNCTIONS /SERVICES OF COMMERCIAL BANKS

- Accepts and Safeguards deposits of surplus cash for customers through opening up bank
accounts.ie savings , fixed deposit, current accounts.
- Provides excellent means of payments i.e. cheques, credit transfers ,etc.
- Provides working capital/cash to its customers by extending short term and long term loans
and over drafts.etc to them.
- Safe guards valuable documents e.g. will ,land title, business agreement, jewelries etc
- Provides advice on investment and tax matters to the customers.
- Acts as reference for the clients e.g. on credit status inquiry.
- Acts as trustee to customers, e.g. Can be trusted with property on death of a client.
- They guarantee payment to overseas suppliers in foreign trade by giving letters of credit.
- They act as foreign exchange agency for the clients.
- They may buy and sell securities and bonds on behalf of the traders.
- They may transfer money through telegraphic money orders, travelers cheques ,etc to other
places.
- They provide night safe facilities/services beyond working hours e.g. ATM withdrawals and
deposits at night.

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  TYPES OF ACCOUNTS OFFERED BY COMMERCIAL BANKS.
A bank account. It is statement in which all the customer’s transactions with the bank
are recorded in the bank. The following are the various types of accounts offered by
commercial banks.
 Savings account.
These are offered by savings banks and commercial banks. They are suitable for people
who are mainly interested in having their money kept safely and accumulate for future use
e.g. Start business or solve personal problems.
 FEATURES OF SAVINGS ACCOUNTS
- Minimum initial deposit and balance is to be maintained.
- Withdrawal is restricted i.e. allowed once a week.
- Notice is required before withdraw of certain amounts.
- No over draft facilities are allowed.
- No use of a cheque book but the account holder is issued with a pass- book to be used when
withdrawing or depositing money.
- Small interest is paid on deposit balance.
- A bank statement is not issued except on request by account holder.
 CURRENT ACCOUNTS / DEMAND ACCOUNTS.
These accounts are offered by commercial banks and suitable to business men or institutions with
large volumes of transactions.

 FEATURES OF CURRENT ACCOUNT.

- Minimum initial deposit is required at the of opening the account
- Deposits can be made any time any amount and number of times in the week.
- Withdrawals are by cheque .
- Overdraft facilities are allowed.
- No interest is given on a current account balance.
- No minimum balance is maintained.
- A bank statement is issued at the end of each month and also on request.

 FIXED DEPOSIT ACCOUNT (TIME DEPOSIT ACCOUNT).

This is suitable for people who have a lot of money which is likely to lie idle for quite a long
time. It is also used as an investment by investors with the bank.

 FEATURES
- Deposits are for a definite period of time.
- Withdrawal is only at the end of deposit period.
- A deposit receipt is issued upon opening the account and is used to withdraw

166
 - High interest is paid on deposit.
- It involves large sums of money.
- It can act as security for a loan or to acquire an overdraft.

QN; Why do business men prefer current account to fixed deposit account;

- Minimum initial deposit is lower with current account than fixed deposit account.
- No minimum balance is required to be maintained on the current account.
- Deposits can be made any time in any amount on current account.
- Overdraft facilities are provided with current account unlike fixed deposit accounts.
- Cheque books are provided which are very convenient forms of payment with current
accounts unlike fixed deposit account.
- It is convenient to use other means of payment like; standing orders, credit transfers
with current account and not possible with fixed deposits.
 OPENING UP A CURRENT ACCOUNT
The process involves:
 Two letters of reference i.e. one from the bank customer and one from the employer
or local council.
 Provision of an identity card / pass port/ driving permit and registration certificate in
case of any partnership or joint stock companies and three passport size photographs.
 Filling an application form for opening up an account and signing of two specimen
signature cards provided by the bank.
 The applicant is issued with an account number. He /she becomes a customer.
 The applicant makes an initial deposit.
 DEPOSITING MONEY.

- Depositing money on saving account is by use of a deposit form.

- On current account deposit is by use of a bank slip /bank pay in slip

- On fixed deposit account deposit is by use of deposit form issued by the bank
 Withdrawal of money
 From fixed deposit account;- withdrawal is by use of a receipt.
 From savings account;– withdrawal is by use of withdrawal form.
 From current account;- withdrawal is by use of a cheque.
 ACHEQUE
A cheque is a written instruction /order by a current account holder to his
bank to pay a specified sum of money to a named person, his order or to the
bearer.
It is an unconditional written order by the drawer to his bank (drawee) to pay
specified sum of money to a named person(payee) on demand.

167
 FEATURES OF ACHEQUE/CHARACTERISTICS
I. Cheque number
II. Date on which withdrawal is to be made.
III. Amount in figures and in words.
IV. Drawer’s signature.
V. Name of the payee.
VI. Drawee. Name of the bank and branch.
VII. Drawers account number.
VIII. Crossings on the cheque.
IX. Serial number.
PARTS OF ACHEQUE

A cheque has two parts;

a. The cheque stub (counter foil). This is the part which remains in the cheque book to provide
evidence for payment. It shows the name of the drawer, payee and reason for payment.
 It provides a permanent record for payment and reference in case of need in future.
 It is a basis of recording in books accounts i.e. cash book.
b. Cheque leaf. It is part of the cheque torn out of the cheque book to be used as means of
payment.

Specimen of a cheque

Drawee

Sn. 186000 STANBIC BANK SN: 186000

18-2-2O13 KAMULI BRANCH DATE: 18-2-2013

Pay: Nakimuli Yulia or bearer or his order.

Paying …..

Nakimuli yulia
Amount shillings two hundred thousand only.
Sh:200,000
…………………………………………………………SHS…200000/=………………………………
Settling debt
KALENZI GILBERT

Cheque no. 0004926. A/C NO. 90300144501

Payee Drawer

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 Cheque stub/counter foil cheque leaf

 PARTIES TO ACHEQUE;

These are people responsible to the cheque . There are three main parties to the cheque.

(1). Drawee; This is the bank and branch which holds the account out of which the money is to be
withdrawn. It is the bank on the face of the cheque, instructed to pay the person named on the face
of the cheque (payee). The drawee in the cheque is stanbic bank kamuli branch.

(2) Drawer; this is the person who instructs the bank to pay money to the named person on the cheque.
He writes and signs the cheque. He/she is the account holder .The drawer in the cheque is kalenzi
Gilbert.

(3) Payee; He is the person named and is to receive money against the cheque as instructed. The
payee in the cheque is Nakimuli Yulia .

 PARTIES ON ENDORSEMENT of the cheque

Endorsement means transferring right to receive money against a document of title by original payee
signing at back. When a cheque is endorsed, the following parties are involved;

(i) The endorser; This is the original payee who signs at the back of the cheque transferring
title to receive money to named person at the back.
(ii) Endorsee; This is the final payee on endorsement of the cheque. This is final person who
receives money against the cheque after endorsement.
TYPES OF CHEQUES
(1) Bearer cheque; this is a cheque which does not bear the name of the payee i.e. it is cash
cheque. Payment against it can be made to anybody who presents it to te bank. It usually
bears ‘’Pay cash”. No identity card is required on withdrawal although the bank may ask for it
for future reference. Such a cheque must be signed by the owner of the account/drawer at
the counter while withdrawing money.
(2) Order cheque; This is the cheque which bears the name of the payee .An Identity card is
necessary at the time of withdrawing and if it is endorsed, the endorsee presents it with the
Identity card when withdrawing money.
(3) Open cheques; An open cheque is a cheque against which payment is made at the counter. It
can be ,bearer or order cheque
(4) Crossed cheque. It is a cheque that bears two parallel lines across its face. This means that
payment against the cheque is not across the counter but to the account number of the
payee. This enables the bank to trace the payee. Crossing may either be;

(i)General crossing or, (ii)Special crossing

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 1. GENERAL CROSSING

General crossing may take any of the following forms;

(i) Two parallel lines without any word in between them. This implies that to be
on the payees account and not more than this.
& co

iii. Two parallel lines with words “& co”. This is similar to one above i.e payment is to be
Two parallel linesmade
with through
words “not
thenegotiable”. These
payees account words
only signify
and not thatthe counter
across
though the payee named on the cheque can transfer the right to
receive money against the cheque, the final payee does not have better
Not negotiable

title than the original payee had to the cheque.

(iv)
Two parallel lines with words ‘’A/c, payee only” .these are instructing the Drawee that
payment against the cheque should be made only when presented for collection through
a/c payee only

the named payee’s account . This cheque cannot be negotiated /endorsed. it is one
of the safe methods of payment by cheque.

(2) SPECIAL CROSSING.

These are crossings with words A/c payee only ,name of the bank, branch and location of the branch.
This implies that payment against the cheque is to be made only to the payees account in the bank
named which is in that branch and in that particular location.

This Cheque cannot be transferred or deposited to any other bank account even if the payee he has
an account elsewhere. It is the safest means of paying by cheque

Special crossing
Kayunba branch
Aic payee only

Kampala road.
Stanbic bank

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Crossings may be used to indicate the maximum amount payable against the cheque by Writing the
maximum amount e.g. not exceeding shs 50,000/=.this is an additional Precaution against falsification
of the figure on the cheque.

Shs 50,000
exceeding
Not

Other types of cheques

5.Honoured cheque. This is a cheque against which payment is effected by the bank. it is also called
cancelled cheque. it Is a cheque which is stamped PAID by the bank.

6. Dishonoured cheque. This is a cheque which the bank has refused to effect payment.

7. Post dated cheque. This a cheque with a future date on it face.

8. Stale /Expired cheque. This is a cheque which has stayed for six months after the date on its face.

9. stopped cheque. This is a cheque which the drawer has instructed the bank not to pay.

10. Forged cheque. This is a cheque which the bank suspects to be forged.

11. Blank cheque. This is a cheque which is signed by the drawer and name of the drawer but does
not bear the amount I words and figures.

12. Cancelled cheque. This is a cheque whose payment has been effected by the bank and is stamped
“PAID”. Also a cancelled cheque is one cancelled by the drawer not to be presented to the bank for
payment.

Precautions taken to ensure security of a cheque:

- Crossing the cheque using general crossings i.e. drawing two parallel lines across the face
without the words &co ,not negotiable, or account payee only so that cash is paid through the
payees account only
- By using special crossings which make it safer because the payment is only through the
payee’s account in a specific bank and branch, with a maximum amount indicated.
- Drawer must keep the cheque safely guarded against risk of theft.

171
 - The cheque must be carefully written to make it difficult for an imposter to make changes on
it.
- Avoid signing a blank cheque to fill in the information to withdrawal the money by anybody.
- Do not expose your signature as people may forge and withdrawal money on your account.
 ADVANTAGES OF USING CHEQUES
- It is convenient, i.e. writing a cheque takes short time than counting large sums of
cash/money.
- It ensures accuracy of payment and avoids mistakes made in counting large sums of money.
- It acts as record of payment. e.g. Counter foil or the cheque leaf in the bank.
- It acts as a receipt for payment e.g. cancelled cheque. A cancelled cheque is one against which
payment has been effected and stamped PAID by the Bank .
- It is potable. i.e. it is easy to carry without being noticed because it is light than large sums of
money.
- It is easy to pay many people using one cheque ie credit transfer.
- A cheque stub acts as a record for payment and reference to the drawer.
- There is effective transfer of money without money leaving the bank.
- It can be conveniently used for deferred/Future payment by writing post –dated cheque with
future date on its face, when presented for payment before the date it is dishonored.
 DIS HONOURING A CHEQUE

This means refusal of the bank to pay cash against the cheque.

Circumstances for dishonouring a cheque

- If the drawer does not have sufficient funds on his or her account. Such a cheque is marked;
R/D ie refer to the drawer or insufficient funds.
- If the drawer is dead or is bankrupted or becomes insane and the bank is informed.
- When the cheque is cancelled. Cancelled cheque is one against which payment is effected or
one that has been cancelled by the drawer who draws a line and writes the word cancelled
on its face.
- When the bank suspects forgery in the cheque. I.e. forgery on the signature, or nature of
transaction.
- If the cheque is stale. i.e. has stayed for six months from the date on its face.
- If the cheque has an error on it eg amount in words does not correspond with the amount in
figures or an error made and corrected is not counter signed.
- If the cheque is not signed by the drawer or if the signature differs from the specimen
signature or in case of insufficient signatures for joint account.
- In case the cheque is post dated. A post dated cheque is one with a future date on its face. It
is dishonoured if presented before the date on it.

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 - If the drawer has instructed the drawee bank not to honour the cheque. This is also called a
stopped cheque.
- In case the drawer has closed his/ her accoun
- In case the cheque is mutilated, soiled, damaged, or torn.
 BANK DRAFT

A Bank draft is a cheque drawn by the bank against its self. Person to buy a draft must pay the
amount equal to the value of the draft to the bank and a fee.

ADVANTAGES OF USING ABANK DRAFT.

- A cheque drawn by the bank is more difficult to dishonored than an ordinary cheque
- It needs no clearance since there is payments against it.
- It is more easily acceptable in home and international trade than ordinary cheques.
- It is more difficult to forge than ordinary cheques.
- It minimizes the risks of having to move with large sums of money in form of cash.
 REASONS WHY CHEQUES ARE NOT WIDELY USED IN UGANDA
- Banks are not widely distributed in most parts of the country. They are mainly distributed to
urban centers.
- Most people are ignorant and illiterate. They do not know how to use cheques.
- Majority of people prefer keeping their money at home/hand instead of banking hence
leaving the use of cheques irrelevant.
- Fear for cheque to be dishonored by banks due to dishonesty of people.
- Cheques at times take long time to mature.
- Most businesses have few transactions which do not need banking .Rendering need for
cheques irrelevant.
 BANK LOAN AND BANK OVERDRAFT;

A bank loan is money lent to an individual/business by a bank against collateral security. It is usually
for a long period and interest is payable on whole amount lent/borrowed. A special account for the
loan is opened. It is a long term liability to the business.

Bank overdraft is money withdrawn by current account holder beyond /in excess of the account
balance. It is usually given for short period and interest is charged on the excess amount withdrawn.
It is a current liability to the firm.

 CONDITIONS/FACTORS CONSIDERED WHEN ISSUING/GIVING ALOAN

- Personal integrity/credit worthiness of the borrower.
- The purpose for which the loan is required.
- The viability of the project for which the loan is required
- Assets in relation to liabilities of the borrower i.e. financial stand of the business.

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- Nature, value and marketability of the collateral security.
- Time for which the loan is required and is to be repaid.
- The prevailing government policy on loans.
- Amount of the loan required.
- The age of the applicant.
 STANDING ORDER. It is an instruction to the bank by an account holder to pay a specified sum
of money to a named person at regular and specified intervals for specified period or until a
stop order is made
 CREDIT TRANSFER. This is a Service offered by commercial banks for settling many
debts/creditors using one cheque
 BANK RATE It is a charge imposed on commercial banks when they borrow money from
central bank as lender of last resort.
 INTEREST RATE. It is a charge by commercial banks on loans given to their customers.
 TRAVELLERS ChEQUES. These are cheques provided by commercial banks in different
denominations to persons who pay for them in advance.. They are convenient to people who
travel a lot. They are provided in both local and foreign currencies. They are safe means of
crying money because any imposter or thief cannot easily get cash against them since they are
signed by the holder at the issuing bank and counter signed when being cashed at the paying
bank on presenting an identity card.
 Credit cards. These are issued by commercial banks or other organizations to give the holder
authority to buy goods at shops designated by the issuing organization for the amount up to
an agreed maximum without using cash. The selling shop presents the bill to the issuing
organization and is paid promptly less any pre agreed commission.
 BANK STATEMENT. It is a financial statement issued by commercial banks to their current
account holders at the end of every month and shows the transactions of the customer with
the bank. It represents the customers ledger account with the bank. It shows all deposits
credited, all withdrawals debited, all bank charges also debited and the balance after every
transaction. A debit balance is an overdraft. A credit balance is a cash balance for the
customer.
 CLEARING HOUSE; A clearing house is a place where different banks meet to settle amounts
that become payable to each other as a result of their clients’ cheque transactions. The
central bank acts as a clearing house for all commercial banks where they have accounts.
 LIQUIDITY RATIO; This the proportion of the value of total deposits that banks are required by
law to keep in form cash or near cash to enable customers to withdrawal on demand. Liquid
assets include cash in form of coins and bank notes, deposits with the central bank and other
banks and money lent to government against treasury bills.

 PROBLEMS FACED BY COMMERCIAL BANKS IN UGANDA.

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 I. Low deposits. Majority of the Ugandans are peasants and poor , some do not need the
services of commercial banks.
II. Loan defaulters. Bank debtors are sometimes reluctant to pay back the loans causing
losses to the banks.
III. Political instability. Some parts of the country are not accessible by banks due to
instabilities and robberies.
IV. High rates of inflation which makes interest charged to borrowers high.
V. Forgery and money laundering which results into massive or gross loss of money.
VI. High interest rates which discourages would be borrowers.
VII. High level of conservatism and poor saving habits among the people.
VIII. Stiff competition among banks.
IX. Government stringent guidelines on commercial banks like initial capital which is too high,
close supervision etc
 THE CENTRAL BANK.

It is a government financial institution established to control and direct other financial institutions
and commercial banks in a country, advise them and the government, provide banking services to the
government and a channel through which it executes its monetary policies. Each country has only
one central bank called by its name eg Bank of Uganda , bank of Kenya etc

 FUNCTIONS OF THE CENTRAL BANK/BANK OF UGANDA.

- Currency issue. It the only currency issuing authority in the country. it issues currency in form
of coins and notes,.
- Banker to the government. It receives deposits and holds accounts of all government
department and ministries.
- Lender to the government. It lends to the government , borrows on its behalf from the public
and ensures payment back of the government debts. Ie manages the public debt.
- Adviser to the government in financial and economic matters.
- Exchange control to maintain stability of the country’s currency.
- Banker to international agencies eg IMF, Word bank, WHO, etc in order to observe their
activities in the country.
- Banker to commercial banks and controls all their banking activities ie credit control, clearing
systems etc.
- Controls commercial banks by accepting , advising and briefing the on government monetary
policies and their roles in accomplishing government se objectives.
- Lender of last resort commercial banks and other financial institutions after they have failed
to borrow money from other sources
 METHODS USED BY THE CENTRAL BANK TO CONTROL COMMERCIAL BANKS/MONETARY
POLICIES /REGULATING CREDIT CREATION/MONEY CIRCURATION/INFLATION.

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 - Bank rate; It increases bank rate when it needs to reduce loanable funds from the commercial
banks and it reduces the bank rate when it wants to increase loanable funds to commercial
funds.
- Open market operation (OMO).During excess money in the economy, the central bank sells
securities to the public and when there is little money, it buys back the securities.
- Compulsory/special deposits; Government through central bank demands that commercial
banks deposit apportion of their deposits with central bank. This reduces loanable funds with
commercial funds and vice versa.
- Cash ratio. The central bank instructs commercial banks to keep a portion of the deposits
received by them in form of cash. This may rise during inflation and lower during deflation.
- Selective credit control/selective control. The central bank eliminates/instructs commercial
banks and other financial institutions to give loans to selected sectors of the economy only eg
agricultural sectors.
- Moral suasion/persuasion. Commercial banks are requested to restrain from excessive
lending and vice versa.
- Legal reserve requirements. All commercial banks are required by law to keep a portion of
their total deposits with the central bank. This reduces the money available for lending and
vice versa.
- Marginal requirements. When the central bank wants to reduce money in circulation it raises
the marginal requirements and when it wants to increase money in circulation it reduces
marginal requirements for commercial banks.
 FINACIAL MARKETS;

A financial market consists of those who borrow or lend money irrespective of their physical
situation. They are four types of financial markets; capital markets, money markets, security markets
and foreign markets.

 Capital market. It is market for long term loans. The dealers are institutional investors. The
lenders are mainly banks like the development banks ,and borrowers are also banks ,large
businesses and individuals.
 Money markets and discount houses; these are markets for short term loans. The dealers
in money markets operate in short term loans while those in discount houses deal in bills of
exchange. However the two overlap each other and are looked as the same.
 Security markets. These deal in already issued shares and stocks of public limited
companies. They are also called stock exchange markets.
 Foreign exchange markets. This is a market for foreign currencies. It is mainly the central
bank and foreign exchange bureaus in Uganda that sell and buy the foreign currencies.
 EXTERNAL STABILITY OF THE CURRENCY

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 The relationship between a country’s currency with other countries currencies explains its
value i e whether low or high. It is the responsibility of the government through the central bank to
maintain the stability so that the local currency does not lose value in relation to other currencies.
This is done through exchange control regulations.

A high demand for a country’s currency externally increases exports. But a low demand for the
currency externally increases imports. This leads to the fall of its value.

The value of the currency is expressed in terms of SDR( SPECIAL DRAWING RIGHTS)

SDR.(special drawing rights) is the unit for measuring worlds currencies. It represents the aggregate
value of world’s leading currencies.

If a country finds its exports falling in relation to the imports ie low BOP/BOP deficits, it can do the
following;

i- Devaluation. This is a deliberate policy by the government to lower the value of the local
currency so as to make it cheaper to get and increase quantity of exports and reduce
imports because the foreign currency becomes expensive.
ii- Import restriction .this is done through quotas so that only very essential goods enter the
country.
iii- Heavy import duties levied on imported goods.
iv- Granting special privileges to exporters to encourage them to export more.
v- Encouraging foreign investors to invest more in the country by guaranteeing repatriation of
their capital and profits

 Business finance.

Businesses get finance from the following sources:

i. Own sources. This is capital from personal savings.

ii. Bank loans. These may be long term or short term loans from financial institutions.
iii. Discounting bills exchange and promissory notes.
iv. Credit supplies from suppliers eg hire purchase firms.
v. Sale and lease back.
vi. Sale of debentures to the public.
vii. Bank overdrafts.
viii. Profits ploughed back in business
ix. Borrowing from friends
x. Gifts and prizes from friends and relatives

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xi. Grants from government

 Sale and lease back: This requires that a person /business man sells property and leases it
back from the buyer for a specified period and pays rent for the period of the lease.
 Bank loans are either mortgaged loans or non mortgaged loans. Mortgaged loans are those
with property pledged against them. They are obtained against security of immovable
property e.g. land, buildings. Etc. which can be possessed in case of failure to repay the loan.
 Institutions which assist business men.
1. Trade associations. These are unions of traders in a particular field e.g. Book sellers’
association, Kampala city traders’ association etc. These represent a particular trade or
industry and have greater bargaining strength when dealing government. They can also deal
in such things as joint purchase, storage, research and collective bargaining.
2. Chambers of commerce. These are associations of business men in an area which may be
regional or national e.g. the Uganda national chamber of commerce and industry.
Services offered by the chamber of commerce are:
They are the ones to issue certificates of origin to exporters..
They keep member informed on all legislations affecting them.
They deal with the government on behalf of the business men.
They provide a forum where business men can discuss their problems. Some even
publish their journals.
They organize trade shows in the country or take part in such shows held outside the
country to keep members secure export orders.
3. Stock exchange markets. These assist in buying and selling already issued shares and stocks of
member companies.
4. External trade authorities. These are set up by the government with specific aim of
encouraging exports and assist traders in increasing exports sales.
5. Commercial attaché. This is a special section in a country’s embassies overseas whose aim is
to assist business men at home to improve their exports. They advise exporters on various
possibilities open to them, help them secure orders, organize trade shows and exhibitions of
goods made in their countries and offer assistance in general terms.
6. Advisory centers. These give sound advises to upcoming traders e.g the Uganda
management and advisory center at Lugogo.
Industrial survey and promotion centers. These undertake industrial survey and
prepare feasibility study reports. They assist both foreign and local investors on
where to locate the industries, what products to introduce, how to go about
setting up a production unit , what steps to take to capture a market, etc.

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  Means of payment
Payment marks the end of a transaction. It settles a debt arising from a transaction which can be due
to a purchase or borrowing cash from an individual or financial institution.
The most common forms of payment include:
1. Those made available by the central bank. This is mainly cash;
o Cash. Cash includes paper notes /currency notes and coins. It is the most common form of
payment readily acceptable by retailers. All the other means of payment lead to this.
Advantages of using cash as means of payment.
i. It is a convenient method of payment for small transactions.
ii. A business man can use it to convert or purchase other currencies of ones choice.
iii. It is readily usable at all times unlike a cheque which can be dishonoured.
iv. It avoids bad debts resulting from credit sales when debtors fail to pay.
v. Other gains can easily be realized for example cash discounts when payments are made.
Disadvantages of using cash as a means of payments
i. It is very risky especially where large cash is required to be moved with to pay for the
goods and services.
ii. Cash payment must relate to particular areas/countries for example currencies work only
in particular countries. This calls for foreign exchange rates.
iii. It is time wasting and inconveniencing to count large amounts of cash/ currency notes and
coins.
iv. Large sums of money /cash is bulky to move with and hence expensive as it may require
special unit to carry it eg a vehicle and security personnel to escort.
v. It requires large space to store/ keep large sums of cash.
1. Means of payment provided commercial banks: They are;
i. Cheques. These are common in home trade.
ii. Credit transfer. They are also used in home trade only.
iii. Standing order. They are mostly used in home trade.
iv. Bank drafts. They are both used in home and foreign trade.
v. Travelers cheques. They are mainly used in foreign trade.

2. Those made available by post office. They are;

i. Cash in registered post. Common in home trade.
ii. Postal orders. They are used home trade only .
iii. Telegraphic money order. It is also used in home
iv. International money order. It is mainly for foreign trade.
v. Postage stamps. These are used for very small transactions such that one instead of
paying cash or other means sends the postage stamps that can be used for sending
letters.

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 3. Means of payment between traders. They are.
i. Bills of exchange.
ii. Promissory notes.
iii. I.O.U (I owe you).

o Bills of exchange.
A bill of exchange is an unconditional order in writing addressed by the creditor to the debtor
requiring the one to whom it is addressed /debtor to pay the stated sum of money to the person
named or his order on demand or at a future stated date.
Features on a bill of exchange.
i. It is an unconditional order
ii. It is a written document
iii. It is accepted by the drawee
iv. Bears an appropriate revenue stamp.
v. Date on it is written
vi. Amount to be paid
vii. Period when payment is expected.

 Acceptance of a bill of exchange

This is the act of writing the word ‘accepted’ across the face of the bill and signing his name as
drawee.
This makes the bill valid and enforceable by law i.e a legal document. The drawee becomes
responsible for the amount in it. Before the bill is accepted it is called a draft. The drawee is also
called the acceptor.
Sample of a bill of exchange.

1st April 2015

Three months after date pay me or my order the sum of shillings two millions only.
Value received. Mutebe Gerald
To:
Accepted

Isabirye Alex
p.O. Box, 215
Kamuli

Drawee/acceptor Drawer.

Parties to the bill exchange:

they are:
i. Drawer/payee. He is the person who writes the bill of exchange demanding to be paid.

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 In the drawer is Mutebe Gerald.
ii. Drawee. Is the person to whom a bill is addressed or being demanded the amount in the
bill . He is also called the acceptor when he accepts to pay the bill and signs it. He is the
debtor in the bill. The drawee in the bill above is Isabirye Alex.
Types of bills of exchange
1. Sight bill. This is a bill of exchange payable on demand.
2. Usance bill. This a bill of exchange payable at a future date. The bill above is a usance bill. It is
a bill payable after date of maturity is reached.
Days of grace. This is a period or days allowed to the drawee of the bill after the maturity
period to organize payment. It is usually three days of grace.
Maturity period. this is the period required of the usance bill to be ready for payment. The
maturity period for the bill above is three months.
3. Trade bill. This is a bill of exchange resulting from trade transactions. It is a bill where in the
drawee is required for the goods bought by him. Most bills are trade bills.

4. Inland bill of exchange. This is a bill of exchange in which both the drawer and the drawee are
from the same country. it is a bill in home trade.
5. Foreign bill. This is a bill of exchange in which the drawer and the drawee are in different
countries . Payment is asked from a person in another country. It is a bill in foreign trade.
6. Money bill. It is a bill of exchange resulting from lending and borrowing money.It requires
that a person who was lent money pays it against the bill.

 Honouring a bill of exchange.

Making payment against the bill after maturity is honouring the bill of exchange. An honoured bill is
one payment is made against on maturity.
7. A retired bill. This a bill paid before maturity date. The bill paid before maturity date is a
retired bill.
 Dishouring a bill of exchange.
It is failure to pay the amount in the bill on maturity.
o Causes for dishonouring a bill.
 If the drawee is bankrupt.
 Death or insanity of the drawee or the drawer before maturity date of
the bill.
 If it is not accepted by the drawee.
 In case the two parties ie the drawee and the drawer agree to extend
the period of payment and a fresh bill is drawn
- When a bill is dishonored the drawer can take any of these options:
Extend the maturity date and a fresh bill is drawn.
Take legal action to recover the money from the drawee. He gets the bill noted. This
involves getting a government appointed person called a’ Notary public’ to approach
the drawee who later notes the bill and refers to the payee. This refers noting the bill.

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 This gives proof that the payee has refused to honour the bill and entitles the payee to
proceed with the law to enforce payment.
o Accommodation bill.
This is a bill of exchange not accepted for value but to oblige a businessman. The drawee and
the acceptor is called the accommodation party. He is a guarantor and is not liable to the
drawer. It comes from a situation where a person who needs money approaches a reputable
person to accept a bill without selling to him goods. He then gets it discounted to get money
against it. He pays the money when the bill matures to the bank.
 Endorsing a bill of exchange.
The main aim of a bill of exchange is to acknowledge a debt. To accept bill means not settle a debt
but to agree to pay at a future date. The drawer on receiving the bill has two options:
i. To keep it until maturity date and he presents it to the drawee for payment.
ii. Transfers the right to receive money against it to someone else by signing at the back and
naming a new payee. This is endorsing the bill. Endorsement may be special, open or
conditional.
Open endorsement. This is where the payee is not named but a drawer’s signature
only at the back. The person holing it can write his / her name or of another whom
he/she wishes to pass the bill over.
Special endorsement. This requires the drawer to name the new payee.
Conditional endorsement. This involves the drawer stating one or more conditions
which must be fulfilled before the new payee assumes the right to get the proceeds of
the bill.
 Discounting a bill of exchange.
Endorsing a bill of exchange is for one of the following reasons:
- To settle a debt in his own name when the creditor agrees to take the bill .
- To endorse to money lending institution. Endorsing a bill to money lending institution
leads to discounting the bill of exchange. The institution gives the holder of the bill the
amount in it less a discount. This is called discounting a bill of exchange.
- A bill of exchange to be discounted must have been accepted. The discount charged is the
interest for the discounting institution. The institution discounting can be a commercial
bank, merchant bank or discounting house.
 Holder in due course.
This is a person who holds a bill before it matures or due for payment. He /she is the last person in
whose favour the bill has been endorsed.
 Liability under endorsement.
The following parties are liable to the bill on endorsement:
i. Endorser. He/she is the person who relinquishes the right to receive money against the
bill. He is the initial drawer and payee to the bill.

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 ii. Endorsee. He /she is the person in whose fovour the bill is endorsed. He / she is the final
payee in the bill.
iii. The ultimate liability lies with the drawer and the drawee in the bill.
Similarities between a bill of exchange and a cheque.

A cheque is sometimes referred to as a bill of exchange. This is because it instructs payment to the
person named in it.

 Differences between a cheque and a bill of exchange.

- A bill of exchange is drawn by the creditor demanding the money while a cheque is
drawn by the person paying/debtor.
- A bill is drawn by one person to the other while a cheque is drawn by an account
holder to his or her bank instructing it to pay the named person in it.
- A bill of exchange cannot be crossed while a cheque is crossed to make it more safe.
- A bill of exchange needs to be stamped by the revenue authority which is not with a
cheque.
- A bill of exchange needs to be accepted to become a legal document but not with a
cheque.
 Promissory note.

This is a document drawn by the debtor promising to pay the value or amount in it to the person
named i.e. his creditor.

Sample of a promissory note

1st may 2015

Three months after Date , I promise to pay NAKIMULI YULIA or her oder a sum of shillings, Two
hundred thousands only for the debt.
Value received.
Mutebe Gerald
Revenue stamp

 ADVANTAGES OF A BILL OF EXCHAGE / PROMISSORY NOTE.

i. It acknowledges a debt by the debtor to the creditor.
ii. It can be discounted by a financial institution or bank..
iii. An accommodation bill can help a trader out of a temporally financial difficult.
iv. It is a negotiable instrument ie it can be transferred from one person to another in
settlement of a debt.
v. It allows enough time to the buyer to dispose of the stock he or she bought before
maturity date.
Disadvantages of a bill of exchange.

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 i. It is expensive especially when discounted.
ii. It can be dishonored. This inconveniences the drawer.
iii. Discount houses or banks are not common in third world countries. This makes a bill the
use of exchange unpopular.
I.O.U.( I owe you.)
This is a document prepared by the debtor informing his creditor of the debt due to him .

 Negotiable and non negotiable instruments.

Negotiable instruments are documents of title that gives a legal right to receive money or
property and can be transferred from one person to another by mere delivery or signing at the back.
They include: bill of exchange, cheques, bills of lading and promissory notes.

 Features of negotiable instruments:

It entitles the holder to receive a certain sum of money or value.
It can be negotiated i.e the right attached to it can easily be transferred from one
person to another by simple delivery or by endorsement.
A person holding it has no better title to it than the person who gave it to him had
endorsement
 Non negotiable instruments.

These are documents of title whose right to receive money or value cannot be transferred from one
person to another. They include; specially crossed cheques. money orders.

5. INSURANCE

Insurance is a service/ activity which undertake to safeguard and compensate a few business men and
organizations which might suffer from some risk insured against.

HOW INSURANCE COMPANIES WORK

Insurance companies work on the theory that only a few people out of the given group are likely to
actually suffer a loss .If each person contributes a small amount of money there would be enough
money to pay those who actually suffer loss and remains a balance for the company ie profits of the
company.

POOLING OF RISKS

It is a situation where every person exposed to a risk contributes a small amount of money to a central
pool out of which those unfortunate few who actually suffer the loss are compensated.

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 The loss is then shared so that only a part of it is taken by each by each insured other than being taken
entirely by one person.

Hence; insurance is spreading the risk so that it is shared by many individuals each taking a small part
instead of being born by one person.

 SOME TERMS USED IN INSURANCE

I. Insured: This is the person or business who takes out an insurance and is promised by the
insurance company to be compensated in the event of loss. He is a policy taker
II. Insurer: This is the insurance company granting insurance to the insured e.g. Nic ,Swico etc
III. Premium : This is the money paid by the insured to the insurer as a consideration for the
insurance cover. It constitutes the pool out of which compensation is made to those who
actually suffer losses.
IV. Compensation. This is the amount of money paid by the insurance company to the insured
when claim is made after occurrence of the risk insured.
V. Risk. It is the event against which insurance is taken e.g. if one insures a car against accident,
accident is the risk.
VI. Insurable risks. These are risks whose occurrence can easily be approximately calculated e.g.
fire, accident ,theft ,burglary etc
VII. Non –insurable risks. These are risks whose occurrence is difficult to estimate and calculate
e.g. earth quake, failure of an examination etc
VIII. Loss. It is the occurrence of the event insured against.
IX. Partial loss. This is when part of the property insured is destroyed.
X. Total loss. This is when the entire property insured against gets destroyed.
XI. Sum insured. This is the value of property as declared by the insured at the time of taking out
an insurance cover or applying for insurance. It is against this sum that insurance premiums are
calculated. In case of total loss the insurance company will compensate the sum insured or the
actual value of property whichever is less. This brings about the aspect of over and under
insurance.
XII. Over insurance. This is when the insured over declares the value of the property insured. He
pays high premium, but in the event of total loss he/she is paid the actual value of the property
insured which is less. Hence he loses.
XIII. Under insurance. This is a situation where the insured under declares the value of property
insured. He pays low premium but in the event of total loss he is paid the value of sum insured
which is also less hence he also loses.
In case of partial loss, the insurance company pays a proportionate value of the property lost
such that the difference is self insured. e.g. Gerald Mutebe insured his house hold property
against fire at shs. 8,000,000/= but the actual value was shs 12,000,000/= fire caught the
property and the loss was calculated to be shs 6,000,000/= how much was he compensated by
the insurance company?
Calculation shs

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 Sum insurance = 8,000 ,000/=
Actual value of property = 12,000,000/=
Sum insured as a percentage of = 8,000,000 ×100
Actual value of property 12,000,000
2
= 66. %
3
2
Compensation = 66. % ×6000000
3

200
= ×6000000
300

= shs 4,000,000/=

Hence shs 2,000,000 is self insured

XIV. Surrender value. This is money paid back to the insured in case he decides to cancel the life
insurance agreement before the period stated in the contract expires.
XV. Contribution. This is money paid by different insurance companies in proportionate
amounts to the insured to compensate the loss suffered if he insured with many insurers. This
brings the aspects of co-insurance and Re- insurance
XVI. Co-insurance. This is when the insured insuring an expensive property decides to spread the
risk with several insurance companies such that each company takes a proportion of the risk.
The company with the largest portion is the leading company. It does the calculations, collects
premiums, pays it to the various co-insurers and in the event of loss, assesses the value of the
loss, collects the contributions in proportionate amounts, and pays it to the insured. The insured
decides the various co-insurers.
XVII. Re-insurance. This is when an insurance company decides to insure itself with other insurance
companies for a certain risk it cannot keep to itself such that in the event of loss they all
contribute towards the sum insured. Re-insurance is an arrangement between the original
insurance company and the re-insurers not the insured.
XVIII. Lloyds . This is an insurance market in London that governs all insurance companies.
XIX. Insurance agents. These are insurance representatives authorized by insurance companies to
offer temporary cover notes and accept premiums from the insured for a commission. Most of
the insurance business is done through Agents.
XX. Insurance brokers. These connect intending insured to the insurance companies or Agents
that can offer insurance policies required for a brokerage.
XXI. Actuary. This is a specialist employed by insurance company to determine the premiums to be
paid by the insured to the insurer.
XXII. Assessor. This is an insurance official who calculates the amount of compensation to be paid to
the insured after suffering loss due to the risk insured. He /she is employed to investigate and
ascertain viability the claim made by the insured.

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 XXIII. Underwriter. This is a representative of the insurance company charged with the duty to
accept or refuse the nature of the risk presented for insurance. He is responsible for calculating
premiums basing on the statistical information available for an underwriting commission.
XXIV. Beneficiary. This is the person or firm to whom compensation is paid.
XXV. Assignment of the policy. This is the process of transferring the title and interest in the
insurance policy to another person or firm. For example if an insured property is sold to
another person, the insurance policy must be transferred to the buyer.
XXVI. Terminating a policy. This is when the insured and the insurer agree to bring the insurance
contract to an end.
XXVII. Nomination. This means to appoint a person or persons to whom the assured amount is to be
given after death of the insured incase of life insurance.
XXVIII. Renewal. This is the bringing of the insurance contract new. It is at the discretion of the
insured to renew the contract.
 PRINCIPLES OF INSURANCE/ DOCTRINES OF INSURANCE

These are the legal guidelines upon which insurance operates. They are:

1. Indemnity. It states that insurance does not aim at benefiting a person but to restore him to the
original financial state he was in before the occurrence of the loss due the risk insured.
2. Insurable interest. It states that a person can take out insurance for the property whose
destruction would result into a financial loss to him/herself and he/she benefits when the
property is safe. This limits people to insure other people’s property which they would be
tempted to destroy so as to gain from loss. One has insurable interest in his/her property, his
life but not other people’s property or life.
3. Doctrine of Proximate cause. This states that, for an insured to be compensated in case of
loss, there must be close relationship between the cause of the loss and the risk insured. For
example if one insures a car against accident and the car catches fire no compensation is made
because the immediate cause of the loss is fire not accident.
4. Utmost good faith (ubrima fides). This states that at the time of taking out insurance the
intending insured must state all the relevant material facts about the property to be insured. It is
upon this information that calculation of premium and establishment of suitability for insurance
is based.
5. Subrogation. This states that in the event of loss and the insured is fully compensated his or
her claim the insurer acquires the right the insured had in the property before the risk occurred.
This means that any benefits in the loss belongs to the insurer e.g. in case a car is destroyed due
to accident or risk insured and he is compensated, the wreck belongs to the insurer. If he
decides to take both it means that he is to benefit from the loss, which is against the principles
of indemnity and subrogation.

Questions

1. Explain the basic principles of insurance.

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 2. Explain the importance of the insurance principles.
 INSURANCE AND GAMBLING

Insurance is similar to gambling in that

 In both situations the parties contribute money.

 There are also different parties in the deal.

The differences however are:

- Insurance aims at helping the unfortunate person who has suffered a loss and is helped to be
restored to the original financial position he was in before the loss .while Gambling aims at
benefiting the winner.
- In insurance the event insured against may never happen. In gambling the event stacked against
must happen.
- One must have an insurable interest in the property insured in insurance. This does not exist in
gambling.
- Insurance is of great help to businessmen and individuals but gambling is a curse for society.
- Insurance is a legal business and gambling may be illegal
- One never loses or gains in insurance. He gets protection in return for premium paid and does
not gain in the loss he simply recovers the loss. In gambling the person either gains or loses i.e.
there is a winner and loser.
Question:
Explain the differences between insurance and gambling.

 CLASSES OF INSURANCE.

There are two classes of insurance;

1. Life insurance
2. General insurance.
LIFE INSURANCE

This covers insurance of human life. A person can insure life in which he/she has insurable interest e.g.
one’s own life, debtors life or partners life.

Policies in life insurance

There are two policies in life insurance

ii. Whole life policy ii. Endowment policy
1. Whole life policy. This requires payment of premium for the entire life of the insured or for a
specified period but the sum insured is payable after the death of the person insured. It is
suitable for people who want to provide money to the beneficiaries after the bread earner is
dead. The insured does not have a chance of using his /her money /savings before death.
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 2. Endowment policy. This policy requires payments of premiums for a specified period only
with the sum insured being payable at the expiry or at death whichever is earlier. It is suitable
for the employed who want to use their savings after retirement. The savings can be re-
invested into profitable ventures.

Life insurance policies are basically savings plans and are taken out by individuals. As individuals, or
as a group.

- Group life Insurance. This is insurance where individuals insure themselves as a group either
as endowment or whole life insurance.
 Assurance and Insurance.

Assurance refers to cover against events which are bound to happen For example death, retirement etc.
it is only time which is uncertain. All life insurance policies are Assurance policies.

Insurance refers to cover against events which may or may not happen for example all property
insurance policies fall under insurance like; fire, theft, etc

Surrender value. This is money paid back to the insured in case he decides to cancel
the life insurance agreement before the period stated in the contract expires.
 GENERAL INSURANCE.

This is insurance of properties. A person can insure property in which he/she has insurable interest
for example his own property.

Types of insurance in general insurance; there are three types of insurance in general
insurance ie ; Accident, fire and marine insurance or departments.

1. Accident insurance:
This covers insurance of mainly vehicles. A wide range of risks are covered and a number of
policies are issued. Common risks in accident insurance are;
 Motor accident
 Loss or damage of goods in transit
 Loss of cash in transit
 Dishonesty of workers who handle cash and goods i.e. embezzlement
 Personal accident/ injuries
 Injuries inflicted to workers while at work
 Injuries inflicted to members of the public by the activities of the business
 Machine break down and consequential loss
 Aviation crash/damage or aviation loss
 Damage due to a breakdown of a glass plate in business.
 Bad debts. Ie loss due to failure of debtors to pay their debts.
 Types of policies in Accident Insurance.

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 Motor insurance policies. This may be third party or comprehensive policy.
 Third party policy covers loss inflicted upon the third party who should not suffer due to
negligence of the driver or the owner of the vehicle. Third party is compulsory to all vehicles
before they are allowed to move on the road.
 Comprehensive policy covers all possible types of risks involved in motor accidents. it is the most
expensive policy.
 Goods or cash in transit policy. This covers Goods or cash carried by any vehicle so that
in case of loss the owner is compensated
 Fidelity guarantee. This covers losses due to embezzlement of an employee or any
dishonesty of the employee.
 Personal accident policy; This is taken out to guard against personal injuries due to
accidental occurrences g broken leg.
 Employer’s liability or work mans’ compensation policy. This covers losses due to
injuries sustained by an employee while at work.
 Machinery break down and consequential loss policy. This covers losses due to break
down of machinery and resultant loss thereafter.
 Aviation and aviation hull; this covers loss in travel in an aero plane or air craft Crush.
 Plate and glass policy; this covers losses of plates and glass metals e.g. window glasses of
a factory or building.
 Public liability policy; this covers losses sustained by the public due to injuries resulting
from Operations of the company or organization.
 Bad debts policy; this covers losses due to debtor’s failure to pay for their debts
 Fire insurance/department.
This insures properties against fire and acts of nature. e.g floods, lightening etc.
Policies and the risks insured are;
 Fire policy; this covers risks of fire out break/losses
 Theft and burglary; this covers loss due to outbreak of theft.
 Floods, war and lightening policy
 Loss of profit policy
 All household risks policy.
 Risks under accident insurance.
 fire out break/losses
 Theft and burglary;
 Floods,
 War out break
 lightening
 Loss of profit.
 Loss of all household risks due to fire

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 3 Marine insurance/department

This covers insurance of ships and goods on ships. It is divided into two sections i.e. marine
hull section and marine cargo sections

 Marine hull insurance; This exclusively deals with insurance of the ship.
 Marine cargo insurance; this deals with and offers policies concerning goods on the ship and /or
ports
It offers policies of;
 Voyage policy; This covers the risks of loss of goods on ship on one particular journey for
example from Mombasa to Bombay etc.
 Open policy. This covers all risks of loss of goods on water.
 Floating policy. Ships insured are permitted to make many journeys and on several ports
without any restriction of period or route. Any loss is paid for. It is common for journeys which
are not regular and whose time cannot be estimated.
 Time policy. This covers the hull, cargo, and freight liability for a specified period irrespective
of where or when the ship sails. It can be for a month up to a maximum of one year. The
contract is terminated on expiry of the time.
 Mixed policy. This combines both time and voyage policy. It stipulates the time when to end
and the specific voyage. For example from Mombasa to Bombay for six months.
 Marine losses.
 Actual total loss. This is when cargo is completely destroyed or ship is completely lost on the
sea. The loss is known as actual total loss .
 Constructive total loss. This is if the ship is not lost and cargo is so seriously damaged as to
be of no practical use as intended. If it is partial damage on cargo or ship, the term average is
used in marine insurance. Average may be general or particular average.
 General average. This occurs for instance if some of the cargo has to be jettisoned in the sea
for the safety of the ship and the rest of the cargo. Jettisoning is deliberate throw of part of the
cargo in water for the sake of saving the ship from sinking and cargo. The partial loss sustained
is born by both the owner of the cargo and the owner of the ship.
 Particular average. This occurs when a partial loss happens on the ship or cargo and it is
born by either the ship owner or the cargo owner as the case may be.

 ROLE OF INSURANCE IN DEVELOPMENT.

 It compensates the insured in case of loss of property or financial loss. This encourages
investment confidence.
 Compensation given sustains the business.
 Compensation in case of sickness or loss of life leads to reduction of costs of social services
provided by the government.

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  It encourages investment as insurance companies may set up real estates such as homes ,
factories etc.
 They provide employment opportunities to those who work with them.
 They pay taxes to the government hence a source of revenue to the government.
 Life insurance policies can be used as security for borrowing money from financial
institution.
 It contributes to a country’s invisible exports therefore reducing BOP deficits.
 It is a means of saving e.g. life insurance policies.
 It promotes international trade because all exports and imports are insured.
 Insurance companies can act as trustees for business/business men.

 Factors to consider when calculating insurance premium.

 Value of property insured. Very expensive property caries higher premiums than low
cost properties.
 Possibility of occurrence of the risk ie the frequency of the risk.
 Age and health of the insured in case of life insurance.
 The number of applicants for such a particular insurance policy.
 Precaution taken to protect the property insured.
 Age of the property insured.
 Procedure of taking out an insurance policy.
 Inquiry. An intending insured makes an inquiry about the insurance from the insurance
broker, agent or insurer himself out of which he/she gets information and determines to
insure the property against risk of his /her wish.
 The intending insured then fills a proposal form. This is an application for insurance and
signifies willingness to pay premiums. In the form the applicant states the risk and all
material facts about property to be insured.
 On receipt of the proposal form the insurance company or the agent may inspect the
property before accepting them and calculates the premium.
 The insured then pays the premiums and is issued with a cover note. A cover note is
proof that premiums have been paid and accepted by the insurer who now under takes to
indemnify the insured in the event of loss. It is valid for thirty days after which a policy
is issued.
 Within thirty days from the issue of a cover note the insurer issues a policy to the
insured. A policy is the main document in insurance. It constitutes a contract between
the insured and the insurer stating the terms and conditions and warrantee under which
the insured is to be compensated in the event of loss.
 If the event insured against occurs, the insured is required to fill a claim form so as to
claim for compensation. Full details of the loss should be stated without leaving out any
information or falsification.

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  The insurance company now arranges to survey the property and assess the extent of the
loss. On receipt of the survey report the insurance company arranges to pay the due
compensation to the insured.
 Documents involved in insurance.
 Proposal form. This is an application for insurance in which the intending insured states the
risk and all material facts about property to be insured.
 Cover note. This is a temporary policy issued and it is a proof that premiums have been paid
and accepted by the insurer. It is valid for thirty days only during which a policy is
issued.
 Policy. This is the main document in insurance. It is a contract between the insured and the
insurer containing the terms and conditions under which the insured is promised to be
compensated in the event of loss.
 Claim form. It a request by the insured to be compensated after the event insured against has
occurred.
 Procedure of claiming for compensation.
 Notification of the insured to the insurer of the occurrence of the loss.
 The insured fills a claim form showing full details of the loss.
 The insurer sends an assessor to determine the extent of the loss.
 On receipt of the survey report, the insurer pays the due compensation to the insured.
 Reasons why insurance services are not commonly used by business men today.
 Insurance services or benefits are invisible and only realized when loss /risk occur.
 Getting an insurance policy is not easily understood i.e. the principles of insurance are not
easy or readily understand.
 Insurance service in Uganda is not widely spread. It is limited to mainly urban areas..
 The insurance industry is misunderstood to gambling which is a curse to society hence
limited market.
 People lack huge valuable assets worth insuring due to poverty.
 Insurance contract is regarded as an additional expense/cost which increases cost of running
business.
 Ignorance . Many business men are not aware of the existence of this service due to lack of
sensitization
 Some insurance companies are reluctant to compensate after loss hence loss of confidence.
 The legal language/jargon used by insurance companies is confusing eg the principles of
insurance.
 Problems faced by insurance service
 Limited market due to ignorance of the people, lack trust, etc
 Poor infrastructure like poor and inaccessible roads in many parts of the country.
 Political instability in some parts of the country limit their operations.
 Corruption and embezzlement of funds especially by the employees.

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  Inadequate skilled personnel to work in the companies.
 Small capital base which limit level of their operation.
 High taxes charged by government which reduce their profits.
 Stiff competition among different insurance companies which forces some companies out of
business.
 Strict and rigid regulation by government through the central bank eg high cash ratios and
cash reserves with the central bank .

 TRANSPORT

Transport is an activity involving the movement of goods and services from one place to another.
I.e. from place of plenty to place of scarcity. The main objective of all commercial activities is to
bridge the gap between the producer and the consumer. The most important commercial activity of
all is through “movement of goods” i.e. Transport..

 IMPORTANCE OF TRANSPORT IN TRADE

 It promotes specialization and exchange.
 It encourages and supports growth of agriculture and may lead to commercialization of
agriculture.
 It may lead to the growth of agro-based industries by movement of raw materials from one
region to another.
 It may widen market for goods and services by facilitating the sale of goods to distant places
which leads to mass production and more profits.
 It enables producers to move goods to customers who are more scattered /over wider area in the
local market.
 It avails consumers with wider variety of goods and services from within and outside the
country.
 It creates market for surplus to be sold in areas where goods are scarce .This increases supply
and reduces prices.
 It increases mobility of labor and other factors of production.
 It makes, it easy to exploit new and distant resources i.e. Untapped resources from remote areas
of the country
 It facilitates communication by transferring parcels and luggage.
 ELEMENTS/FEATURES OF TRANSPORT

The four elements of transport are;

 The way
 The unit of carriage
 The method of propulsion

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  The terminal

The way; This something in which goods must move .e.g. water, road, air.

The unit of carriage; this is what makes goods move. i.e. carrying goods e.g. vehicles, trains, ships,
Aero plains etc

Method of propulsion; this is the driving force or power of the unit of carriage e.g. petro engine, jet
engine and electric motor. The choice of the method depends on the size of the vehicle, speed desired
and the fuel available

The terminal; this is a place where goods are loaded and off loaded. Usually a terminal of one unit of
carriage is starting point of another mode .e.g. rail station for trains, park for vehicles, airport for
airplanes, port for ships etc

Modes of transport/forms of transport

They are ;

 Water/sea transport
 Railway transport
 Road transport
 Pipe line transport
 Air transport
 Water transport/sea transport
This involves movement on water or sea waters, oceans, lakes, canals and rivers.
 Types of ships used on sea waters;

There are mainly two types of ships on sea i.e. liners and tramps

 Liners

These may be passenger liners or cargo liners. They are large ships on sea waters, which follow a
regular timetable, call at port at regular time or interval and follow regular routes, even if they have to
go without enough cargo. Liners are owned by established shipping companies which operate in or as
the same lines like railway corporations.

Liner companies form themselves into associations called liner conferences. ‘Liner conferences are
formed by liner companies operating in a particular route to regulate charges to their customers in
order to with stand unfair competition of the tramps by allowing special discount to the regular
customers.

 Tramps.

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These are small ships in sea waters just like small cars on the roads which do not follow a regular
route or time table. They would go anywhere if there are goods to be carried. Their rates are always
lower than those charged by liners and depend largely on demand. i.e. when demand is high they
charge high rates and when demand is lower they charge lower rates.

 Charter party

This is an agreement between the shipper and the chartering business men/hirers and gives
hirer/chartering business men absolute control over the ship/vessel for the period of contract. It is
signed by the traders who hire the entire ship to carry their cargo for a particular voyage or a number
of voyages with the ship owner.

 Containerization

This is the packing of cargo in standardized containers which are sealed by the exporter or his agent
and loaded to the ship for delivery to the importer or his agent sealed.

Advantages of containerization.
 It enables use of modern cargo handling machinery to load and offloading cargo e.g. cranes.
hence no time wasting.
 It saves time and labor since containers are packed at the exporter’s premises.
 It takes up small space as compared to space taken by small packages or different packages not
in container.
 It enables accommodation of large quantities of goods within the container.
 It is safer and lower insurance premium are charged because theft is minimized as the contents
are not exposed /unknown.
 Special containers may be built to handle special types of goods e.g. chemicals, gases, this
reduces risks for road users.
 Assists road transport because it is easier to transport the containers.
 It minimizes damage of goods due to bad weather. I.e. sunshine, rain etc
 It minimizes the cost of constructing ware houses since goods are safely kept in containers.
Disadvantages of containerization
 It is not suitable for small quantities of goods which cannot fill the containers. This may result
into loss as different exporters share the containers.
 Requires machines which may prove expensive to construct and sustain.
 It increases the cost of goods to the importer.
 It reduces employment opportunities as machines are used to handle the goods instead of
human labor.
 It is not suitable for certain goods/items like living things, perishables, and awkwardly shaped
goods.

Shipment in containers may take the following forms;

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  Full container load (FCL) .This is where the shipper loads the container with his own cargo
destined to one consignee. The container is then delivered intact to the importer.
 Less than container load (LCL) .This is where cargo packed in a container belongs to many
shippers or traders i.e.is consolidated. At the port of destination the container is opened i.e.
deconsolidated and deliverance are made to various consignees.

 Dry port

This is an inland container terminal where exporters who are from in land take their products to be
packed in containers and later carried to sea ready for export. Ie all clearance and documentations are
done there.

Advantages of dry port

 It provides convenience to the exporter and the importer with the produce are saved the trouble
to travel longer distance to the sea port like Mombasa to send and receive their products.
 It reduces pressure on main sea port like Mombasa particularly customs authorities because
part of the work is done at dry port.
 Dry port can be built in several parts of the country like Kenya and Uganda
Advantages of sea transport.
 The way is free i.e. no payment for the use of the sea.
 It is suitable for carrying bulky goods.
 Special ships can be constructed for transporting special cargo e.g. oil, perishable goods.
 It is a cheap form of transport over long distances.
 Sea transport has large carrying capacity.
 There are less accidents or risks compared to other forms of transport like road transport.
 It is suitable for carrying fragile or flammable goods.
Disadvantages of sea transport.
 It is slow hence not suitable for perishable and urgently required goods.
 It is limited to particular countries which have access to the sea.
 It is expensive to construct and maintain harbors and ships.
 Congestion at the sea port may lead to delay in delivery of goods.
 Saline conditions at the sea may affect some goods.
 Accidents on the sea may lead to total loss as compared to other means.
 It is not flexible i.e. Goods cannot be delivered to their final destination.
Some common terms in relation to sea transport;
Lay days. These are days allowed for the ships to stay at the port waiting for loading or
unloading
Demurrage. This is a charge to be paid by the shipper for the period the ship stays at the port
beyond the lay days.

Question: Under what conditions may water transport be necessary ?

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  The way is free. No country has to pay for its use.
 Where the tonnage is high and carriage costs are reduced.
 Where goods are heavy and bulky.
 When distance to be covered is long.
 Where there is reduced traffic congestion on the waters compared to road transport.
 Where there is terminal for loading and unloading.
 .Where goods are not urgently needed.
 Where goods are fragile or delicate.
 .Where water bodies are navigable.

 Lake transport/River transport

This is transport on lakes and rivers like Lake Victoria, river Nile etc.

Problems of Lake/river transport

 Most lakes and rivers are too shallow to allow sizeable ships.
 They are not navigable hence not used for navigation.
 Some rivers do not have steady flow and are interrupted by numerous falls.
 There are a few cannels which are also not navigable.
 Since steamers are used small volume of goods are transported by this means.

Rail way transport

This is transport on railway lines. The unit of carriage is the train. Each country has its own railway
corporation which offers the rail way services e.g. Uganda railway corporations in Uganda.

Advantages of railway transport;

 It is quite cheap over long distances.
 It is economical to run a large train in comparison to a large lorry. e.g. one driver and one guard
can easily manage the train with up to 35 carriages and carrying load of up to 20 tones un like a
lorry carrying only 25tonnes which needs a crew of a least three.
 Rail way lines in east Africa are not run with an intention of making profits but to provide
essential services.
 Railway transport follows a regular timetable which helps business men to plan the movement
of their goods.
 They are sometimes convenient to large businesses and industrialists where goods can be
delivered up to the door of the industrial complexes especially for large volume of goods.
 There are low risks of theft/high way robbers compared to road transport.
 They reduce congestion on roads. There is also no congestion on railway lines.
 They are suitable for bulky and heavy goods.

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  Return cargo can be planned since they follow a set time table/schedule.
 It can be faster especially with express train over long distances.
Disadvantages of railway transport
 It is a slow form of transport though faster than the sea but slower than road .
 It is very uneconomical over short distances.
 It can serve only towns with rail stations.
 It does not offer quality since it is not for profit making. e.g. Delays and pilferages are often
complained of.
Circumstances under which rail way transport may be used/preferred
 When goods are heavy and bulky.
 When return cargo is planned as trains follow regular time table/schedule.
 When there is need to avoid high way robberies.
 When some areas do not have other means of transport.
 To avoid congestion on the way.
 For reliability because trains operate on a time table.
 When goods are to be carried over a long distance i.e. it is economical

6. Pipe line transport

It is transportation or carriage of commodities through pipes from one place to another.

The most common commodities carried by this transport are;

(i) Petroleum products e.g. oil, kerosene and petrol

(ii) Gas
(iii) Water
Advantages of pipe line transport
 The service is reliable, regular and fast.
 Has fewer risks of pilferage of the products
 Safety. There are few accidents
 Cheap and easy to maintain once constructed. i.e. the running costs per kilometer are low.
 Large volumes can be transported easily.
 Suitable for transportation on rough terrain where roads and railways cannot be constructed.
 Extension can easily be made to serve other areas.
Disadvantages of pipeline transport
 Heavy initial capital costs are incurred in installing pipes.
 It is used for only liquids and gases i.e. It is selective.
 Pilferage and leakages are not easy to notice and detect in time
 It may be wasteful if not used to full or near full capacity.
 It may lead to environmental destruction or pollution in case of leakage or bust of the pipe.

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  Rusted pipes contaminate the products.
7. Air transport

This is transportation by use of aero plane as units of carriage in the space. It suitable where
speed is very essential over very long distances mainly overseas and connecting different
countries in short periods. Their terminals are air ports.

 Air way bill

It is a contract of carriage between the importer and air Line Company for goods transported by
air. It differs from a bill of lading because it is not a document of title.

o Advantages of air transport

 It is the fastest means of transport over long distances.
 Its carrying capacity is large, Hence more goods can be carried as compared to vehicles.
 It is good for carrying very expensive and urgently needed goods e.g. drugs ,guns/ armaments or
carrying the sick due to speed.
 It is safe hence low risks of theft because it is highly guarded.
 It is comfortable and convenient because accommodation, toilets and restaurant services are
offered.
o Disadvantages of air transport
 It is the most expensive means of transport hence non economical for low value goods or if they
are not urgently needed.
 It is not suitable for low cost goods.
 Due to a number of handling points it does not efficiently serve for fragile goods which easily
break.
 It is not suitable for awkwardly shaped goods.
 In case of accidents total loss can be incurred by the business man hence high insurance
premiums are paid.

8. Road transport

This is carrying of goods or travel on roads using vehicles; i.e. lorries. cars, motor cycles
Trucks, etc

 Advantages of road transport

 Flexibility. Road transport can deliver goods from door to door.
 Goods can easily be sold enroute.eg. on the way
 It is suitable and economical for small consignments.
 Less capital is required to set up roads than railway transport.

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 It is not restricted to regular time table hence no delays compared to railway and water transport
 It is very fast over short distances. Therefore it is suitable for delivery of emergency goods such as
drugs and food over a short distance.
 It is safe because a business man can accompany the goods, hence pilferage may not be common.
 It is cheap and it is possible for one to use his personal vehicle. This makes running a business
economical.
 Roads are widely available in most parts of the country.
 Roads complete and connect other forms of transport like railway, water, air transport.
 Risks of accidents may not lead to total loss compared to water, air transport. Hence insurance
charges are low.
 Problems faced by road transport
 Poor roads especially mar ram roads are easily damaged by heavy rains and traffic.
 High costs of transport due to high prices of fuel.
 Highway robberies are common due to insecurity in some parts of the country .
 Damage of goods due to poor handling.
 Delay of delivery of goods due to heavy traffic congestion.
 Loss of goods due to high rates of accidents.

 Factors to consider when choosing a means of transport.

 Nature/kind of goods. Fragile, Valuable and perishable goods need special handling and extra care.
 Weight of goods. Some means are not suitable for very heavy goods.
 Bulk of the goods. Some means are not suitable for very bulky goods.
 Speed and urgency. Goods needed urgently can best be moved by air.
 Cost of transport in relation to the value of the goods. e.g. Low cost goods by railway and valuable
goods by air.
 Distance. Road transport is most suitable for short distance.
 Flexibility. Some means do not make delivery to the final destination apart from road transport.
 Risk involved/safety e.g. conditions of means, high way robbery, accidents, loss of goods etc.
 Terminals. I.e. ability to deliver goods /people at their appropriate point of loading and off loading.
 Consignment note;

Where a business man wishes to send goods through a common carrier hands over goods together with
a consignment note. It is a document instructing the transporting company of what to do with the
goods from the business man. It shows the terms and conditions under which goods are accepted for
transport.

The person sending the goods is the consignor and the person to whom goods are sent is the consignee
and the goods sent are consignment.

 Common carriers;

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 Transport carriers are individuals who take business of carrying other peoples goods from one
place to another .They may be local or universal local carriers. Local carriers operate on fixed
routes and accept goods only to those destinations that are served by their routes. Universal carriers
operate on much wider scale and accept goods for any destination with in a country or region.

Rights and duties of carriers;

These are defined in the carriers ACT 1930

The provisions are;

 They have a right to demand payments or freight charges in advance but not to regular
customers with monthly payments.
 Also have a right to reduce delivery of goods until their cheques have been paid.
 Carriers must exercise due care and deliver the goods with out un reasonable delay and they are
liable for damages.
 Carriers are responsible for safety and prompt carriage of goods.

Their responsibility ends;

 When they deliver goods to the consignee or address.

 Twenty four hours after arrival of goods marked ‘to be called for’.
 Twenty four hours after they have informed the consignee of the arrival of goods.

If the goods are not collected within the specified time the career assumes the position of a
warehouseman and charges an additional fee for this service.

Terms used;

1. CR.- company risk. This implies that goods are to be sent at company’s risk. The transporter is
responsible for any loss or safety.
2. OR.- owners risk. Goods are sent at owners risk. Here the transporter is liable if goods are
damaged by negligence of transporter’s employee. The transporter charges higher rates for
company risks to cover the insurance premiums.

Post office as a carrier.

Some goods are sent through parcel/post both air and surface mail parcels. They charge high
costs than common carriers but slower at delivery. A receipt is issued to the sender if
registered. The addressee is notified of the arrival of the parcel.

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 5.4 Ware housing
 Definition:

Ware housing is the storage of goods and materials, waiting for demand, sale clearance or
processing.

Ware house; it is a store for finished goods, raw materials or tools etc

 Importance of ware housing.

 It provides storage facilities for goods for goods to protect them against damage, loss and
pilferage.
 Preserves surplus thus saving large quantities of goods which would otherwise be wasted.
 Public warehouse provides temporary accommodation of goods for producers with no
sufficient rooms.
 It serves as a reserve letting trade to continue all the year around.
 Traders can take time to get funds for payment of taxes for goods which enables importers
to look for market for goods before clearing them.
 It enables stabilization and regulation of price and supply.
 It encourages mass production which may lead to low price which increases demand.
 It facilitates entre-port trade because goods are kept in preparation for re-export.
 In a ware house goods can be prepared for sale. They can be sorted out, weighted and
branded and blended.
 Reduces on operational costs/expenses of the trader by way of saving on transport costs
otherwise the trader would have to bring in stock for every order.
 Helps traders to stock a wide assortment of goods giving the consumers variety of choice.
 Storage in anticipation of demand. The trader may anticipate the future demand for the
goods so he prepares for the market by storing before hand
 Characteristics of a good warehouse:
 Ideal location i.e. easy accessibility.eg near main road.
 Stable buildings which should allow for future expansion and adequate to store goods of
different of different kinds safely.
 Proper handling equipment to avoid damage during the loading and off loading.
 Efficient and well trained staff for loading e.g. good trained manager.
 It should have appropriate and speedy transport.
 Preservation measures facilities to store the goods for a long time without being spoilt
especially for perishable goods.
 Should have good security to protect the goods from being stolen
 Types of ware houses.
o Pubic ware house

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 This is a ware house owned by private individuals/business men to be hired by the public. It
enables traders without ware houses to store their goods until demand.
o Manufactures’ warehouse.
This is owned by producers’ /manufactures to store both raw materials and finished goods
ready for sale.
o Bonded ware house.
This is owned by private business men but under control of customs ‘authorities it can also be
owned by government to store goods waiting for payment of customs’ duty/tax. They are
usually found at boarders of countries etc
o Wholesaler’s warehouse.
This is owned by the wholesalers to store goods for the producer and also pending increase in
market demand.
 Importance of bonded ware houses.
 To the government
- It assures tax collection from imports as g goods cannot be released without duty duly paid.
- Checks on the goods imported in the country and minimizes the un desirable ones to be
brought in the country e.g. poor quality.
- It prevents smuggling of goods into the country.
 To the importers.
 In case of goods for re-export duty may not be paid but the importer may pay storage
charges.
 The importer may look for market of the goods while the goods are still in the ware house
e.g. advertising.
 The importer is given time to look for goods looking for funds to pay tax while goods are
still in the bond. This can be paid in installment.
 For goods that lose weight duty is paid basing on weight hence he pays less.
 The importer may not pay for goods sold while in bond; the tax is passed on to the buyer.
 Goods can be prepared for sale while in the bond e.g. .Blending, pre-packed, labeled etc.
 To the public
 It assists steady supply of goods throughout the year.
 It stabiles price due to steady supply of goods as goods are stored during periods of plenty
and realized during scarcity.

 Organization of a ware house.

Aware house has an organization set structure in departments each of which has its own activities.

 Administrative department. This deals with general administration and

correspondence for example maintaining the necessary files , appoint staff, arrange for
training of staff, maintain staff records, etc

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  Finance and accounts department. This is responsible for accounting systems,
preparation and keeping of peoples records of all financial transactions e.g. invoice and
statements to be sent to customers, receiving and effecting payments on behalf of the
business, budgeting, preparing final accounts etc.
 Purchasing department. It is headed by the purchasing manager. This does the
procurement and restocking of goods that are required e.g. maintaining a list of regular
suppliers, receiving goods from suppliers, placing orders, maintaining store records etc.
 Sales department. This is responsible for receiving orders from customers processing
and delivery of the orders. It insures strict credit control and attends to customers
complaints.
 Publicity/advertising department. This in conjunction with sales department carries
out the promotion of sales thought advertising media.
 sometimes delivery of orders.
 Secretary and legal department. This is headed by the company secretary or office
manager. It is responsible for legal affairs, handles all correspondences, record and
personnel matters ie appointment of workers or staff. It is therefore the responsibility of
this department to,
o Keep up to date with correspondence
o Maintain the necessary files
o Advise the management on matters of legal importance eg company
registration, dividends etc
o Appoint staff members or in case of senior employees advise the general
manager and the owner on their appointment.
o Arrange for the training of personnel
o Maintain staff records.
PROBLEMS FACED BY WARE HOUSING:
 High operational costs in transport, security, insurance, etc which reduce profit margin.
 Dishonest employees who sometimes steal goods from stores.
 Inability to obtain and maintain customers stocks required to have the business run profitably.
 Protection of stock may sometimes be inadequate as goods are sometimes exposed to
contamination, pilferage, fire etc.
 Failure of traders who get goods on credit to pay hence bad debts which increase on loss of the
business.
 High rate of competition from the other holders of warehouses especially with public
warehouses.
 Poor transport and communication facilities which limit their accessibility.
 High taxes charged by government on public and bonded warehouse reduce their would be
profits

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 5.5 Communication

Communication refers to the conveying of information and ideas from one person to another.

Importance of communication in development of trade.

 It makes it possible to acquire information about goods and services such as prices, quantities,
quality etc
 Instructions concerning delivery, packaging can be sent to those concerned very easily.
 It acts as link between the supplier and the business world i.e. bridges the gap between
suppliers/producers and the business world
 Facilitates making inquiries orders, quotations.
 Contacts are made without movement hence time and money is saved.
 Written communication also acts as evidence of contract and agreement between the traders.
 Written communication provides permanent evident/record about transactions.
 It enables the producers know the likes and dislikes of the consumers and hence make them
produce according to their demand.
 It saves life and property/goods when accidents occur or in case of break down.
 It enables producers cope with competition since they can be aware of market conditions.
 It enables constant supply of goods into the market as shortage is overcome by moving surplus
to shortage areas.
 Process of communication (Elements of communication)

Communication process has the following elements;

i. Sender. This is the person who intends to convey the idea or message to others.
ii. Idea. This is the subject matter of communication. It may be an opinion, attitude, feeling,
views, orders or suggestions.
iii. Encoding. This involves converting the subject matter into symbols like actions or pictures
forms in which the theoretical and intangible information can further be passed.
iv. Communication channel. A person who wants to communicate chooses a suitable channel for
sending the information. This is the medium for transmitting information to the receiver.
v. Receiver. This is the person who gets the information sent.
vi. Decoding. The person, who receives information from the sender, tries to convert it in a way
that is meaningful to his complete understanding. This is decoding.
vii. Feedback. This is a process of ensuring that the receiver has got the message and understood in
the same sense the sender meant.
Barriers to effective communication/factors limiting effective communication;
 Different languages. Thus failure to understand the communication
 Attitude or emotional reaction which causes anger.
 Poor network which affects telephones and internet connections.
 Noise hence failure to perceive the correct massage due to noise.

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  Illiteracy. Hence inability to write and read messages which may cause delays in delivery of
letters.
 Poor listening skills.
 Limited service providers for example post offices which limit access to letters.
 Distrust which may lead to ignoring of the communication.
 Premature evaluation of the massage.
 Distortion of nonverbal communication.
 Differing perceptions hence misinterpretation due to unfamiliar terms and jargons.
 Information over load which may lead to ignoring or forgetting the information.
 Physical appearance of the sender.
 Poor preparation of the message.
 Poor timing of the message.
 Physical impairment or disability of the receiver.

Qualities of a good communication ie 8cs.

Factors influencing effective communication

 Completeness. The message must be complete and geared towards the receiver‘s perception of the
message.
 Concreteness. The message should be supported by factual materials such as well researched data
and figures. The should not be misinterpreted or nothing should be left to imagination.
 Courtesy./ courteous. Communication should involve friendly and respect for the receiver.
 Correctness. This involves use of correct language, in business communication, right grammar, and
avoiding errors, stylistic lapses or wrong verbs. This increases trustworthiness and the receivers
will feel that they are taken seriously.
 Clarity. Clear or plain language is characterized by explicitness, short sentences, and concrete
words.
 Considerate. Committing with target groups. Choose a group and the message be geared to them,
eg professionals, level of education, age , interested.
 Conciseness. The story line should be considerate and with supporting information.
 Creativity. This is when words and sentence structure are used creatively. Eg short sentences
alternated with long ones.

 Types of communication

Communication can be written or oral communication.

 Oral communication. It is sending of massages by use of mouth either by telephone,

radios, television, and announcement using loud speakers, direct contact between
individuals i.e. face to face.
Telephone.

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It is communication through telephone; It is now common to use mobile phones, cellular phones which
were mainly through the post office.

Advantages of using telephone

 It is the fastest means of sending information and therefore suitable for urgent massages.
 It eliminates physical movement from one place to another to convey information thus time and
money is saved. it is also saves the time which would be used in writing letters.
 It is clear and allows opportunity to ask and answer question and to use the voice to stress the
massage.ie dialogue between trader and suppliers in a a transaction.
 It enables Instant reply /response to be received.
 Record of message can be kept by use of text message/Sms
 It is cheaper especially shorter massages.
 It reaches people who are far apart and has a wider geographical coverage.
 It avails information about payment of money through mobile money, internet banking etc.
Disadvantages of telephones
 It does not leave any record for reference when required
 It has limited coverage since it is limited to only those with telephone sets and some are not
covered with the telephone network.
 It is not suitable to people who have oral and audio disabilities especially eg the dump.
 There is no physical contact between the parties making communication.
 It is more expensive especially for long massages than letters
 It is not suitable especially if one has desired to have a direct dialogue.
 It has no confidentiality since it can be heard by the people at the post office.

Radio calls

This is a service common in remote areas and security organizations. Operators of this service
operate their own radio communication equipment for which they must obtain a license from
the corporation so that they can be contacted during fixed scheduled periods each day through
the control station. The speech is transmitted in one direction at a time. One person speaks at a
time while the other is listening. It is then necessary to say over after one speaking as a signal
for the other party to reply.

The majority of the communication services are through the post office,

 POST OFFICE.

It is an institution set and through which communication is effected from the sender to the receiver. It
is under the ministry of information and telecommunications department.

 Services offered by the post office.

 Delivery of ordinary mails, letters, packets, newspapers, magazines.

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 Registered mail services for a special fee
 Offering cash on delivery services (COD)
 EMS (expedited mail services) which guarantee quick delivery
 It offers telecommunication services e.g. telegrams and telex
 Offers Post rest ante services to temporally people in a place/town.
 Offers business reply services
 Provides banking services e.g. the post bank
 Transport services e.g. post bus
 Issue of post office stamps
 Licensing newspapers , magazines, insurance companies etc
 Advertising either by use of; postage stamps, post cards etc
 Reasons why business community does not commonly use post office today;
 High operational costs making it expensive.
 Inefficient delivery services.
 Insecurity in most parts of the country leading to theft or loss due to damage especially with
parcels.
 Better services offered by the competitors.
 Advancement in technology especially most people have mobile phones and internet services.
 Written communication
- It is communication involving transfer of written massages in form of letters, parcels, newspapers,
postcards, telegram, Facsimile (fax), electronic mail, etc. All can go through the post office more
efficiently and can be sent through other means.
 Advantages of written communication,
 It provides written record for reference in the future.
 Detailed information can be provided.
 It is cheaper for long distances.
 It is used to confirm oral communication.
 The message can be sent any time of the day e.g. E-mail, Telex or FAX.
 Identical copies can be sent to various people.
 Disadvantages ;
 It is slow. It is therefore not suitable for urgent messages.
 It is limited to literate audience only.
 The cost of writing and transferring the message may be high compared to oral communication.
 If not well prepared it may be misunderstood or misinterpreted.
 It may be received by an audience to who it is not intended.
 It is not suitable for messages which require immediate feedback since feedback takes long time.
Forms of written communication through the post office;
Letters and printed matter

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Letters can be sent to any destination in the world by surface or air mail. Express letters may be given
special priority when sorting and reach their destination faster than the ordinary letters.

 Advantages of using letters for communication.

 They are less costly than telephones.
 Detailed information may be sent by letters.
 Act as a record for future reference.
 Illustration and pictures may be sent by letters.
 Confidentiality in maintained
 Information can be sent to many people at once.
 It is possible to prepare before writing and sending massages.
 Information is kept for long since it is possible to refer to it any time.
 Information may not be distorted it is possible to refer to any time.
 It can be read at ones convenience for example after work.
 It is preferred for official use.
 Disadvantages of letters:
 It is time consuming because it takes time to write letter.
 it is not suitable for the illiterates who cannot read and write therefore has limited audience in
Uganda where many people are not literate.
 It is slow. It takes time before letters are delivered to the intended person therefore not suitable
for urgent messages.
 It does not provide immediate/instant feedback.
 It favors people with post boxes.
 Letters can be got by people to whom they are not intended.
 Letters can easily get lost or damaged while in transit.
Telegrams: A short massage sent by means of filling in a special form. The addressee gets a
copy of the massage within the same day or following day. The charges depend on the length
of the massage and are higher than the ordinary letters. It is important for important and urgent
massages. Telegrams may be dictated by the post office over the phones.
Franking machine. A firm can .apply for a license to use this machine and does not need to
use stamps. The machine prints the amount of postage and the name of the sender on the
envelops and the post office is paid the amount on the envelop at the end of each month or
agreed intervals.
Business reply posts: A license is issued for use of this service on application to post office
for post cards, or letters . It involves use of self addressed envelopes, with a note that postage
will be paid by the addressee. No stamps are fixed on envelops and a small fee is charged by
the post office in addition to the postages to the addressee.
Registered letters: Letters are registered on the post office to declare the content so that it
undertakes to compensate the sender incase it gets lost.

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 Speed post: This is a service to handle urgent and small packets for delivery within certain
major towns in the country. The letters are hand delivered not through the post but to the
addressee very quickly. It costs a little extra but is of high advantage to business men and
individuals who wish to send urgent documents ,cheques, post orders and money orders .
Telegraphic address. Short telegraphic addresses may be registered at payment of annual fee
which reduces costs of sending telegrams . The advantage goes mainly to the sender not the
firm with this address.
Telex services. This provides a direct link between the subscribers and other users all over the
world. The message is typed to the sender’s machine and is automatically printed to the
receiver’s set so that the receiver can read it when received at his convenience .
Certificate of posting. A letter under sent under certificate of posting is recorded by the post
office and the certificate is issued. This may be produced as evidence if the need arises. Legal
notices and similar letters are usually sent this way.
Post rest ante services . This service is common to travelers who are likely to be in a
particular town for a short period and hence have no post box number. They therefore advise
their associates or friends of the town they are likely to be for given dates so that their letters
be sent to that particular post office addressed as say;

‘’ Miss. Nakimuli yulia

Poste Resante

Jinja post office uganda’’

People expecting letters go to the post office and are given their mails upon production of satisfactory
identification papers.

 Post office as a means of remitting money

A post office remits money through the following ways;

 Money order
 Post order
 Postage stamps
 Money order; This is used when one wants to remit large sum of money from one place to
another through the named post office. A receipt is issued to acknowledge payment and the
receiver must provide proof of identity.
 Postal order. This is used for remitting small sum of money through the post office. Postal
orders are issued in fixed denominations payable at any post office. Payment can be made to
any person upon presenting it.
 Postage stamps. It shows the cost for carrying letters. A person can settle the debt by sending
postage stamps to the creditor especially for small debts. The receiver can then use them to
send letters.

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 Visual communication; this involves use of visual features to pass information from one
person to another. Eg. Diagrams, signs, and symbols.
Internal and External communication.
Internal communication. This is communication with in an organization. It is also called inter
office communication..
External communication. This is communication between the organization and the other parts
of the world that is the public.
 Factors to consider when choosing the means of communication
 Urgency of massage; Telephones are faster than letters for urgently required massages.
 Distance involved, letters and telephones are the best for long distance compared to face to face
communication.
 Details; messages which require a lot of details may be sent using letters.
 Confidentiality; confidential messages can be sent using letters not telephones.
 Reference. Massages requiring record of reference should be sent using letters.
 Cost involved. Letters are cheaper compared to telephones.
 Feedback; massages requiring immediate feedback should be sent using telephones or face to
face communication.
 Need for accuracy. When sending instructions to someone or important assignment to be
accomplished letters are used.

5.6: SALES PROMOTION

Sales Promotion is any activity done or campaign to boost the sales of a trader or firm.

The following activities are involved in sales promotion;

 Personal selling: This involves informing the prospective buyers about the good and
services presented by the Firm having face to face meeting. This may be through salesmen,
show rooms, trade fairs, hawkers etc.
 Offering free samples to prospective buyers so that they taste and see what they are to buy.
 Price reduction i.e. trade discounts to induce quantity purchase
 Offering free gifts; given to customers who buy the goods and continue buying.
 Carrying out market research. This involves getting detailed information about the demand
of the product and getting the customers opinions regarding the products of the other
competitive firms.
 Giving credit facilities to trust worth customers either in form of hire purchase or deferred
payment.
 Organizing competitions to the commodity so that the winners are given prizes.
 Pre-packaging: This refers to having attractive packaging of the products in different sizes
before they are sold.

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 Branding. This is giving goods trademarks, trade names to enable customers differentiate
on the products from other similar products of other producers.
 Sponsorship of games, programs on radios, TVs e.g. MTN sponsoring the African Cup of
2014.
 Renovation of business premises or buildings.
 Provision of after sales services to buyers.
 Use of loss leader policy.
 Advertising.
 Personal selling:
It is selling directly to customers by the trader himself and using sales men so as to increase
sales of a business. It involves sending sales persons to visit customers in their homes or work
places to discuss with them about new or existing products sold by them.

Advantages of personal selling.

 It creates direct and good relationship between the seller and the customers
 A trader or seller is able to know the specific needs of different customers.
 The sales person can educate the customers on the uses of the products.
 It helps to win over the buyer’s confidence in the business and its products.
 It facilitates in getting regular and permanent customers since it involves repeated purchase.
 It arouses interest about the product on sale.
 The seller is able to analyse and negotiate prices with the customers.
DISADVANTAGES OF PERSONAL SELLING
a) It is a very expensive method to pay salaries to sales men.
b) Sales men may take the gifts and samples intended to be given to prospective buyers hence
the products may not be known.
c) It covers limited area where the salesmen concentrate.
d) Travelling salesmen face risks of highway robbers, roads accidents, bad weather which all
undermines sales.
e) Some slogans used by sales men are impolite to potential / prospective buyer.
f) Goods tend to get damaged before they are sold due to multiple handling.

 Ways of making personal selling effective;

 Good communication skills.
 Attractive personality for example being smart, clean and presentable.
 Good customer care.
 Good public relations.
 Honest and sincere.
 Knowledgeable about the product.
 Good negotiation skills.
 Good customer psychology.

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  Patient with customers for example ability to return for an appointment.

ADVERTISING.

It means spreading information by producers about availability of their goods and services in the
market to increase sales .

 TYPES /FORMS OF ADVERTSING.

 Persuasive advertising /competitive advertising: This is tries to convince the
consumer that a particular product is better than the same products of other producers
by playing their psychology .it is in most case deceitful.
 Informative adverting. This provides information by simply stating facts and opinions
about goods and services offered for sale. It does not influence choice but only educates
the customer about the product by giving the; uses colour, design and other feature of
the product.
 Direct advertising. Direct advertising .this is the adverting which appeals to particular
group of people eg. professionals like teachers, medical personnel’s etc. for example
use of medical journals to doctors.
 Indirect advertising. It is advertising which is open and does not appeal to particular
audience but to the entire public.
 Mass advertising. This aims at increasing demand for the entire product, manufactures
and brand names mentioned. Therefore all producers of the same products combine and
advertise as one.
 Local advertising: this is advertising that appeals o people in particular area eg
presenters of music to particular place use burners or posters Information etc
 Nationwide advertising; this is advertising intended to cover the whole country. It
may also be worldwide or regional etc.
 Information required in an advertisement message,
 Name of the business, company, or producers advertising.
 Nature of the product and its compositions.
 Pricing of the product.
 Strength of the product.
 Weakness of the product.
 The market at which the product is aiming.
 The amount the advertiser is prepared to spend.
 Name of the product.
 Location of the business.
 Uses of the product, its application and handling.
 Slogan. A word or phrase that can be used to repeatedly across different regions.
 Benefits of the product to the customer.

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  FUNCTIONS OF ADVERTISING
 Bridges the gap between the manufacturers and the consumers by giving information
about goods from consumers
 It leads to competition leading to better quality products at reasonable prices.
 Help producers to retain market.
 Provides the necessity for the presence of the products.
 It induces consumers to buy hence increasing sales.
 Provides necessary information on salient features of different products like size,
quality, price etc
 Help consumers know the technical use of products and their applications.
 Enables launching or introducing of new products on the market.

 Advantages of advertising to the :

 Producers /seller.
 Bridges the gap between producers and consumers.
 It informs new customers of the availability of the products/goods to buy.
 It persuades the consumers to buy his products instead of other producers.ie creates
market
 It enables producers to introduce new product on the market.
 To retain market so that he does not lose some of the customers to other manufacturers
i.e. brand loyalty.
 To increase sales , production and profits ,the aim of each manufacturer is to make
more sales and profits
 To out compete his competitors, this may eventually lead to becoming monopolist and
raise prices hence more profits.
 It constantly reminds the customers of the availability of the product hence increasing
sales in areas of low demand.
 Encourages research which makes producers improve quality.

 The consumers
 It creates awareness to consumers about availability of new products and services.
 It informs the consumer; prices, quality, and other features of the products. This enables
consumers to compare different products of different producers.
 Consumers enjoy high quality goods and services as a result of competition among
producers.
 It pushes / forces manufacturers to compete which may lead to reduction of prices.
 It makes consumers aware of new uses of the existing products by giving technical
information about them.

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  It makes consumers aware of the price changes and other offers in the market.

 Disadvantages of advertising
 Some advertisements are misleading and deceitful and leads people to buy and pay for
poor quality goods.
 Advertisements are expensive and their costs are usually passed to consumers in form
of higher prices.
 Consumers are often compelled to buy goods which they may not need as a result of
repetitive advertising.
 Some commodities often advertised turn out to be inferior or of poor quality than that
expected.
 Consumers may be forced to live beyond their means because advertisements induce
them to borrow money to buy what they cannot afford or make consumers to live in
indebtedness.
 Some advertisements have negative effects on morals of consumers especially those
that emphasize the role of sex in life.
 Some advertisements point out only the positive aspects of a product and leave out the
negative or harmful effects e.g. adverts for alcoholic drinks and cigarettes
 Advertisement may lead to brand loyalty which may cause monopolist and result into
exploitation of consumer.
 Persuasive advertising makes choice difficult e.g. Tea, communication industry.

Advertising media

This refers to the means through which an advertising message is conveyed to the public. Medium is
singular while media is plural.

 Forms of advertising media

Press media/ Medium. This involves use of news papers, magazines, journals, reports, etc in
advertising.

1. Newspaper advertising.

This involves use of dailies, like new vision, monitor newspapers, weeklies and monthly news papers
etc

Advantages:
 They are relatively cheap for buyers and advertisers compared to journals and
magazines.
 They are easily circulated e.g. news papers bought by one person can be used by a
cross section of many people.

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  Diversity of languages. News papers can be written in different languages e.g.
English, Luganda, Ateso etc
 Repetitive; it’s possible to repeat an advert because they are produced daily, weekly,
monthly etc
 More detailed information; Newspapers can include Pictures, illustrations, color and
other features of the product being advertised to create desired impact.
 Wide coverage; newspapers have wide coverage both local and international
compared to journals and magazines.
 Future reference; news papers can be referred to when needed in future because it
provide permanent record.
 Newspapers can be read at one’s convenience.
DISADVANTAGES
 Short life span .They easily get stale e.g dailies expire at the end of the day.
 They are limited to the literates while the illiterates cannot have access to news papers and
the adverts.
 They are expensive to buy therefore few people can afford to buy newspapers daily.
 They are non-selective in that they do not appeal to specific groups of people. Many readers
of newspapers are not the potential buyers of the product advertised.
 They are urban centered; their distribution does not well reach the rural areas.
 They are not suitable for urgent adverts on they are published daily and monthly.
 There is no personnel contact between the consumer and advertiser reducing the effect of
advertising massages.

2. MAGAZINES, JOURNALS AND REPORTS

 These are published after defined period of time, for example weekly, monthly, annually
etc.
ADVANTAGES
 Wide coverage because it is both local and international.
 Durable because they last for long time before expiring unlike newspapers which take
usually aday.etc
 Specific. The message can be directed to specific readers or audience e.g. women, parents
such as parent magazines, doctors for medical journals.
 They are more effective and entertaining than newspapers because pictures are colored and
more appealing.
DISADVANTANGES.
 They are expensive in terms of printing and buying by the public.
 Limited languages are used especially the foreign ones such as English ,swahilli, etc
therefore do not favour illiterates.
 Less frequent compared to news papers.

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  They are more persuasive than informative.
 Few people are interested in magazines therefore limited audience.
3. TELEVISION ADVERTISING

This media may be used to show slides and short films. Organization sponsor programs on televisions
eg MTN sponsoring the world cup for the sake of advertising their products during the period etc.

ADVANTAGES.
 Easy illustrations and demonstrations therefore suitable for technical equipments.
 Lively and entertaining especially with the use of graphic colours and music in the
advertisement.
 It has a bigger audience because it covers a wide area compared to newspapers and posters.
 Advert may be specific ie directed to particular target group e.g the rich and well to do.
 The message advertised is instant i.e produced immediately after it is received.
DISADVANTAGES.
 Televisions advertising is expensive ,Therefore goods for mostly high value goods and services
not cheap ones
 Limited coverage. T.v advertising is restricted to only those with the T.v sets ie well to do
people and areas covered with the T.v network
 It is less informative compared to newspapers ie it is inclined to persuading.
 No record is left for the message to be referred to when needed by the observer /listener.
 Short life span. It is presented for a short time and one can easily miss it out if absent.
4. RADIO ADVERTISING.

It is advertising through radio stations like Radio Simba, UBC, etc.

ADVANTAGES
 Wide coverage, The message reaches many people at ago.
 It can be presented in many languages when programmed at different times the of day.
 Easier and cheaper to prepare the message compared to newspaper adverts.
 Message is repetitive and has a lasting effect.
 It is very fast, there is instant dissemination of message/ information.
DISADVANTAGES
 It lacks illustrations and pictures therefore not good for technical goods.
 Costs may be high due to repetition.
 Radio stations are highly controlled by government.
 Not all people can afford radios, hence the advertisement is limited to those who have radios.
 There is no immediate feedback of listeners.
 Message is aired for a very limited time.
5. CINEMA AND FILMS.

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 The advertiser may arrange to show slides or short films about his products usually in the
cinema halls or outside on special arrangements. Usually the young and teenagers visit
cinemas therefore good for such ages.
ADVANTAGES.
 It has clear demonstrations and illustrations therefore good for technical goods.
 It is lively and entertaining because there is always music in the advertisement in the
background.
 It is potable. The slides and projectors can be carried from one place to another.
DISADVANTAGES:
 It is expensive than radio and news papers.
 It is urban centered and not common in rural areas.
 It usually appeals to the teenagers /young and lack interest among the adults and middle age .
 Less informative than persuasive hence may be misleading and deceitful.
6. WINDOW DISPLAY POINT OF SALE ADVERTISING
This is the most effective advertising medium because all advertisements lead to it i.e. Where
goods are sold. It involves neatly arranged goods in window glass, shelves, and around the
place of selling. It has powerful impact in the consumer’s decision to buy through impulse
buying.
7. TRADE FAIRS AND EXHIBITIONS:
A trade fair is where producers or manufacturers display their products to potential buyers
using gazzeted show grounds eg at Lugogo show ground by UMA. They usually announce and
goods can be sold on site.
Exhibitions are usually organized by selected group of producers like farmers, fine artists etc.
like one at Jinja show ground. They usually last for short time and do not have to permanent
stalls for any producer unlike the trade fairs.
Advantages of trade fairs and exhibitions.
- They have wider markets as people to attend come from different parts of the country.
- Goods can be sold on spot at the show or exhibitions
- Producers share experiences with other producers and get assistances in methods of
improving on their products.
- Market research is possible because sellers get information on what consumers want.
- It provide information to consumers about usage, application, precautions and
instructions etc about the goods.
Disadvantages:
i. They are short lived i.e. they take place for a short period of time and once with in the
year eg one week.
ii. It is expensive to organize and participate in.
iii. Some goods get spoilt during the period of display.
iv. It considers limited range of goods for example it may not involve bulky ones like
machines which may be difficult to transport.

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 v. It has limited audience. Not many people visit the show ground yet the blind who do
not see do not get the message.
vi. It is urban centered and village population is ignored.
9. Outdoor advertising. This involves advertising using neon signs, banners, billboards, posters
and signposts.
a) Posters. It involves the use of information in form of diagrams designed on paper about
products or services with their descriptions. Posters are placed on walls of buildings, strategic
places like door entrance of public places like hospitals, junctions of roads etc. they are usually
local i.e. Appeals to only those with access to them in a particular locality. They are also
affected by bad weather i.e. during heavy rains. They are good for advertising low value goods
because they are cheap.
b) Banners. These are pieces of cloth with information about the products offered for sale by the
firm. They are placed/hanged in strategic places, points like market entrance, road junctions,
public parks etc . They are effective to those who have access to them in such places in which
they are placed but they are usually vandalized by those who want to use the pieces of cloth for
other purposes.
c) Neon signs. The massage is placed in glass with advertising light in it showing the
advertisement especially at night. Neon signs are placed on top of buildings or business
premises or near them. They are expensive both in initial cost and maintenance for example the
advertisers may incur costs of rent and electricity. They are therefore used by large scale
business like banks, air transport companies, video halls, peteral stations, large bars and hotels
d) Bill boards and sign posts. They are massages printed on metallic boards especially bill
boards and on wooden boards for sign posts indicating illustrations of products advertised.
They are usually placed at strategic places for the public to read them for example in road
corners near the centers or towns. Sign posts are also displayed at the business entrance and
give location of businesses.
Advantages of outdoor advertising.
 They are displayed at low costs e.g. posters.
 They have wider coverage especially if placed in strategic location like main roads junctions.
 A creative poster can stimulate potential buyers.
 Neon signs can be seen from a distance especially at night hence it is possible to advertise even
if it is at night.
Disadvantages.
 It may be affected by bad weather like heavy rains especially the billboards, posters, banners.
 Neon signs are very expensive to install/buy and maintain.
 It is limited to given geographical areas.
 It is limited to only those people within the locality.
8. Specialty advertising. This is when business/firms offer special articles to their customers
with their trademarks, brand names and symbols embedded on them such articles/items may
include pens, calendars, t-shirts, key holders etc

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9. Direct mail. This involves traders or manufactures sending circulars, pamphlets, brochures,
and catalogues by post to known retailers. The post office publishes telephones and post boxes
directly for each member state. It is therefore easy set the address of appropriate retailers and
consumers.

Choice of medium of advertising:

The factors that influence the choice of advertising medium are;

 Social class to which the medium appeals. Newspapers and wall posters usually appeal to
ordinary people while films and televisions appeal better off people.
 The age group to which the medium appeals. Magazines like Joe drum etc appeal to the youth
and news paper to the middle aged and mature.
 The geographical areas covered by the medium. Newspapers, magazines, radios, television
have a country wide appeal and posters etc are local.
 The cost of the medium e.g. advertising on television is very expensive than on radios more
expensive goods can be advertised through more expensive medium.
 Number of people reached by the medium e.g. newspapers reach more people than magazines,
radio reach more people than television.
 The economic group to which the medium appeals. E.g. some products like machinery are not
of interest to the ordinary people hence they are advertised through journals like medical
journals for medical appliances engineering journals for engineering machines, office journals
for office equipment etc
 Nature of the products. Products that require demonstration and illustration on how they are
used, need media like television e.g. technical equipments like computers. Etc
 Advertising agencies:
These are specialized business enterprises that organize to advertise on behalf of others
businesses or organizations for a commission.
 Services offered by these firms include;
 They offer expert advice on the medium to be used.
 They have contacts with various news papers, magazines, radios and televisions people. Hence
they can arrange for publications or broadcast of advertisements at very short notice and
competitive price
 They have their sections of art that design advertising materials. They design newspapers,
brochures, pamphlets, catalogues etc
 They design and make cinema and make television slides
 Some large firm also undertakes to prepare short films and arrange to screen the slides and the
films.
 They have contacts with printing presses and arrange for printing of posters, leaflets, etc
 They handle all arrangements for sales promotion campaigns, checking entries received,
dispatching prizes etc

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  They design and arrange for installation of neon signs, billboards.
 They arrange and organize market research for producer’s goods.
 Special advertising appeals.
An advertising appeal refers to certain wards/slogans which provoke or convince the potential
buyers to buying the products advertised.
Their areas of interest include:
Selecting points of human weaknesses, desire, emotions, or likes and dislikes; they include
a) Appeal to responsibility e.g. blue band gives you energy to grow, mothers who care cook with
kimbo etc
b) Appeal to saving. ’Buy more to earn discount of 10%’’
a. Appeal for pleasure and enjoyments e.g. ‘’Well come to world of pleasure and
entertainment’’
c) Appeal for protection and quality; e.g. celtel now you are talking
d) Prestige e.g. class. ’Intelligent men smoke Rex’. ‘you can tell who drinks bell lager’’
e) Social acceptability, “krest, stand out from the crowd’’
f) Age and beauty.’ Go gay; every woman has a right to look young”
g) Cheapness; etc. eg. “buy now while price lasts”.

Some related questions;

1 a. Define money.
b. Outline the qualities of good money. c. what are the functions of money?
2 a. Distinguish between barter trade and Exchange
a. What can a country gain from barter trade?
C . What are the problems of barter trade?
3 a. Differentiate between a commercial bank and a central bank.
b. Outline the functions of the central bank.
c. Explain the methods used by the central bank to control commercial banks.
4 a. Outline the functions of commercial banks in your country.

b. What problems do commercial banks in your country face?

5 a. Define a cheque.

b. Draw a cheque and show;

i. The drawee ii. Drawer iii. Payee.

c. mention ways of making the cheque safe.

6 a. Outline the advantages of using a cheque.

b. Give reasons why many business men do not use cheques today.

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 c. Under what circumstances can a cheque be dishonoured?

7 a. Distinguish between the following terms,

i. Bank loan and bank overdraft.

ii. Credit transfer and standing order.

b. What factors are considered by the bank manager to give loans to customers?

8 a. Define a bank draft.

b. Outline advantages of using a bank draft as a means of payment.

c. Give reasons why business men prefer using current accounts.

9 a. Outline characteristics of the following types of accounts;

i. Current account. ii. Savings account iii. Fixed deposit account.

b. What are the uses of the following to a trader?

i. Bank statement. iii. Standing order

ii. Credit card iv. Credit transfer

10 a. Outline the main sources of capital for a business.

b. Explain any four institutions that help business men in Uganda.

c. What are the functions of the National chamber of commerce?

11 a. Distinguish between cash transaction and a credit transaction.

b. Outline the advantages of paying by cash,

i. to the buyer, ii. To the seller.

12. a. Distinguish between a bill of exchange and a cheque.

b. Outline main features on a bill of exchange.

c. under what circumstances can a bill of exchange be dishonoured?

13. a. Distinguish between the following types of bills of exchange;

i. Usance bill and sight bill

ii. Discounted and dishonoured bills

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 iii. Accommodation and retired bils.
iv. Cash and trade bill

b .Outline the advantages of using a bill of exchange.

14.a. Distinguish between negotiable and nonnegotiable instruments.

b. Outline the features of negotiable instruments.

c. Mention any three examples of negotiable instruments.

15. Explain the basic principles of insurance.

16. Explain the importance of the insurance principles.

17. Describe the types of risks a factory owner is likely to insure against.
18. Describe the types of risks a factory owner is likely to insure against.
19 Explain when accident insurance would be of benefit to a manufacturer.
20 Explain the possible insurance policies the owner of a factory is likely to undertake in case
of accident insurance.

21 a. Define the terms;

i. Insurance ii .Sum insured iii. Cover note iv. Policy v. Risk

b. Explain the principles of insurance.
22 a. Differentiate between the following terms;
i . Assurance and insurance. iii. Whole life and endowment policies.
ii. Co-insurance and re-insurance
23a. Explain the importance of insurance in the development of the country.
Or. Property insurance is not a waste of money though no refund is made when the risk
insured does not happen.
b. Give reasons why insurance services are not commonly taken by business men in Uganda
today.

24 a. Outline the risks that are under accident insurance.

a. What policies can the owner of a factory undertake with insurance.

b. Outline the problems faced by insurance companies.

25 a. Mukere insured his house against fire but when he claimed for compensation it was not
honoured. Give reasons why the insurance company may have refused to compensate.

26a. Describe the policies that the following can insure against;

i. Owner of a super market.

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 ii. A firm specialized in exporting goods from Dubai to Uganda.

iii. A manufacturer of textile like Nytil factory

b Outline the procedure of taking out an insurance policy

27 a. Define the term pooling of risks.

b. Outline the steps taken to claim for compensation

c. What problems are insurance companies facing today.

28 Explain the following terms;

i. Voyage policy; vi. Actual total loss
ii Open policy. vii Constructive total loss.

iii Floating policy. viii General average.

iv. Time policy. Ix. Particular average.

v. Mixed policy.

29a. Differentiate between the following;

i. Total loss and partial loss

ii. property insurance and life insurance.
iii. Contribution and premium
iv. Proposal form and claim form
v. Fidelity guarantee and employers liability
b. Why is insurance regarded as a contract of indemnity?

30. a Define the following terms as used in sea transport:

i. Dry port. ii. Full container load iii. Less than full container load. Iv. Charter party.

b. Outline the advantages and disadvantages of water transport.

31.a. Distinguish between liners and tramps.

b. Define containerization as used in sea transport.

c. Explain the advantages and disadvantages of containerization.

32. Under what circumstances may road transport be preferred to railway transport.

33 a. Outline the importance of transport in the development of your country.

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 b. What problems are faced by traders in transporting their goods?

34 a. Give the advantages of using road transport over other forms of transport.

b. What problems are faced by road transport in Uganda.?

35. a. Distinguish between liners and tramps.

b. Give circumstances under which water transport may be preferred.

c. Outline the factors to consider in choosing a mode of transport.

36 a. Define containerization.

b. Outline the advantages and disadvantages of containerization.

37 a. Mention the commodities that are transported by pipe line.

b. What are the advantages and disadvantages of pipe line transport?

38. a When is air transport necessary to be used for transporting goods?

b. What are the disadvantages of air transport?

39. a. What are the advantages of railway transport over road transport?

b. Outline the disadvantages of railway transport.

40. a. Define the following terms; i. consignment note. ii. Air way note.

b. Outline the problems face

41a. Define warehousing.

b. Explain the role played by warehousing in the development of trade.

42. a. Explain the different types of ware houses

b. What problems are faced by the ware housing business.

c. Outline the functions of a bonded ware house .

43. a. Outline the characteristics of a good ware house.

b. Explain the organization of a ware house.

c. Explain the problems faced by warehousing business.

44 Explain the functions of following documents:

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 Postal order b. money order. C. post rest ante d. telegram.

45a. What are the services offered by the post office .

b Why are people moving away from the use of post office?

46 a. What factors are considered when choosing a medium of communication?

b Explain the importance of communication in the development of your country.

47 a. Distinguish between; written and oral communication.

b. Outline the advantages and disadvantages of written communication.

48. a. Explain the advantages and disadvantages of;

i. Letters ii. Telephones.

49 a. Distinguish between sales promotion and advertising.

b. Explain the various methods a retailer can use to increase his sales.

50. a. Distinguish between persuasive advertising and informative advertising.

b. What are the functions of advertising.

c. Outline the disadvantages of advertising to;

i. the consumer. ii. the business man/trader.

51. a. Explain the advantages of advertising to;

i. The seller ii. The consumer.

b . Give the various information that traders must give to the advertising agent to make an
advertisement.

52 a. What are the advantages and disadvantages of radio advertising?

b. What factors are to be considered to choose an advertising medium?

c. Outline the functions of advertising agents.

53 a. Define Market research.

b. Explain any five roles of market research to a trader.

c. What are the problems in market research?

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