Given below are two statements:
Assertion (A): A trading concern needs lower investment in fixed assets than a manufacturing organisation.
Reason (R): A trading organisation usually needs a smaller amount of working capital, as there is usually no processing.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): A trading concern needs lower investment in fixed assets than a manufacturing organisation. — True. A trading concern only buys and sells goods. It does not need to buy plant and machinery, so its fixed capital is lower.
Reason (R): A trading organisation usually needs a smaller amount of working capital, as there is usually no processing. — True. A trader does no processing, so its raw materials and finished goods are the same. It can sell as soon as goods arrive, so it needs less working capital.
Why R does not explain A?
A is about fixed capital, the money put in long-term assets. R is about working capital, the money put in current assets such as stock. Holding less stock does not reduce the need for machines or buildings, so R does not bring about A.
The correct reason for A is that a trading concern does not require to purchase plant and machinery. A manufacturer needs them to make its goods, so its investment in fixed assets is higher.
NCERT (2026-27 Edition): “1. Nature of Business: The type of business has a bearing upon the fixed capital requirements. For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organisation; since it does not require to purchase plant and machinery, etc.” “1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation. This is because there is usually no processing. Therefore, there is no distinction between raw materials and finished goods. …” |