Financing Business

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The principle of indemnity in insurance states that an insured should not profit from a loss but rather be restored to their financial position prior to the loss. This principle is applied to prevent the insured from benefiting financially from an insurance claim.

Among the options provided, Life Insurance is usually excluded from the principle of indemnity. In the case of life insurance, it is not possible to quantify the loss of life in monetary terms and therefore indemnification in its traditional sense does not apply. Instead, life insurance works on a principle of paying out a specified sum when the insured event (death or specified incident) happens.

Other types of insurance like Fire, Fidelity Guarantee, and Marine are indemnity-based, meaning the payout aims to cover the actual financial loss. For example, if a fire damages property, the insurance payout is based on the value of the property destroyed. Similarly, fidelity guarantee insurance covers loss due to employee dishonesty, and marine insurance compensates for damage or loss of goods during transit. Therefore, these fall under the principle of indemnity.

In summary, life insurance is excluded from the principle of indemnity because it deals with the incalculable loss of a life by providing a predetermined benefit rather than a directly quantifiable financial covering of loss.

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(a) Four sources of credit available to a sole trader are: 1. Trade credit: This is the credit extended by suppliers to the sole trader to purchase goods or services on credit, with a specified period to pay back the debt. 2. Bank loans: This involves borrowing money from banks to finance the business activities of the sole trader, with an agreement to repay the loan with interest over a specified period. 3. Personal savings: This involves using personal savings to finance the business activities of the sole trader, without incurring any interest charges. 4. Crowdfunding: This involves raising funds for the business activities of the sole trader from a large number of people through an online platform. (b) Explanation of credit instruments: (i) Acceptance credit: This is a type of credit where the seller draws a bill of exchange on the buyer, who accepts the bill by signing it. The buyer is then allowed to defer payment until the maturity of the bill, while the seller can discount the bill with the bank to obtain immediate payment at a reduced amount. (ii) Luncheon voucher: This is a type of credit instrument used to provide employees with subsidized meals during lunchtime. The vouchers are typically issued by the employer and can be redeemed at designated restaurants or canteens. (iii) Bill of exchange: This is a written document that orders the debtor to pay a certain amount of money to the creditor at a specified future date. It is a widely used instrument for financing trade transactions. (c) Advantages and disadvantages of hire purchase to the seller: Advantages: 1. It enables the seller to sell high-value items to customers who cannot afford to make full payment at once, thus increasing sales volume. 2. It provides a regular stream of income for the seller over the hire purchase period. Disadvantages: 1. The seller is exposed to credit risk, as there is a possibility that the buyer may default on payment. 2. The seller may incur administrative costs in managing the hire purchase agreement. 3. The seller may not receive the full value of the goods sold, as the interest charged on the hire purchase may reduce the overall revenue earned.