[Commerce Class Notes] on Difference Between Provision and Reserve Pdf for Exam

As we all are aware that businessmen prepare their accounts on the basis of the going concern concept assuming that their business will continue for an indefinite period of time. Therefore, in order to ascertain the net profit of a business each year, businessmen not only consider current contingencies but also future contingencies. In reality, provision and reserve are the terms that are actually related to the future needs for which part of the current earnings has to be set aside. But there are few points of differences between provision and reserves which we will learn through this article.

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What Does The Term Provision Mean In Accounting?

Provision is an amount that is put away from the profit earned by the company to cover expected losses or expenses even though the specific amount might be unknown.  A provision is considered as a form of saving, rather, it is identified as an upcoming liability. 

Sometimes IFRS calls the provision a reserve, however, both the terms are not interchangeable. The provision aims to cover business  liabilities that might occur in the near future whereas reserve is a part of business profit that is put away to enhance the financial position  of a company through expansion or growth. 

Needs For Provision In Business

  • Depreciation, renewal, or reduction in the asset value. 

  • A disputed claim

  • Redemption of Liability

  • Writing off bad debts/doubtful debts

  • Contingent Liabilities

  • A known liability, for which amount cannot be determined with accuracy.

  • Specific loss on payment of taxes or realization of an asset

General Rules In Creation of Provision

  • Provision is created by debiting a profit and loss account.

  • Provision is created to meet liability that is known or for any specific contingencies. For example, provision for doubtful debts, provision for depreciation, etc.

  • A provision is created to meet the known liability or contingencies.

  • It is not available for distribution as a dividend among the shareholders.

  • A provision is set for a definite amount, and hence, a definite amount is set aside every year to meet the known contingencies.

  • A provision is generally represented on the liability side of the balance sheet.

What Does The Term Reserve Means In Accounting?

Reserves are also known as retained earnings. Retained earnings are defined as a part of the business profit that has been set aside to strengthen the financial position of a business. Reserves are often used to repay debts, purchase fixed assets, fund expansion, or payment of bonuses or dividends. In accounting, the different types of reserves have several purposes and come from distinct income streams, but two of the most common types of reserves are capital reserves and revenue reserves.

Types of Reserves

The two most common types of reserves are:

1.Revenue Reserves: Revenue reserves arise from a company’s net profit earned through normal, daily operations. The revenue reserves are generally employed by business for small or short-term purposes, business expansion, contingencies which are liabilities that could potentially occur. Revenue reserves are further categorized as:

  • General Reserve: General reserved by its name implies that is not laid aside for any specific purpose. It can be used to meet any future contingencies or unknown liability. It is not mandatory to create a general reserve. These reserves are created only when the company earns sufficient profit. The object of this reserve is to strengthen the financial position of the business. It is recorded on the debit side of the profit and loss appropriation account.  

  • Specific Reserves: As the name suggests, specific reserves are set aside for a specific purpose. It is utilized for only that purpose for which it is created and not for the other purpose. Whether a business earns profit or losses, it is obligatory for it to create reserves for specific purposes. It is shown on the debit side of the P&L account. 

2. Capital Reserves: A capital reserve is usually created out of a profit which is capital in nature such as capital gains, premium on issue of shares or debentures, profit prior to incorporation, profit on revaluation of asset or liabilities, etc. It should not be used to distribute a dividend among the shareholders. Instead, it is used to strengthen the financial position of the business, or to write off the capital loss or losses of abnormal nature.

Difference Between Provision And Reserve: Tabular Representation

Point of Difference

Reserves

Provision

Method of Creation

The reserves in the business are created by debiting profit and loss appropriation account

The provisions are created by debiting profit or loss account

Need

The creation of reserves depends upon the financial policy of business

The creation of provision is used as it depends upon the financial emergency of a business.

Objective

A reserve is a total of known liability

A provision is a total of unknown liability 

Necessity For Creation

It is not necessary to create reserves as it totally relies on the business policy

The creation of provision is not compulsory.

Utilization

The amount can be utilized for any other purpose for which they are created because they represent undistributed profit.

The amount cannot be utilized for purposes other than for which it is created.

Nature

Reserves are an appropriation of profit. It implies that reserves are created only if the business earns profit, else no reserves are created.

Provisions are charged against profit. It implies if there is a loss in a business, provision is a must, and hence it is compulsory for the company to create provisions.

Feature

It strengthens the financial position of the business. Reserves are added to the amount of working capital. 

Provisions are created to meet a specific loss on realization of assets or an accrued liability. It is also used for meeting out an unanticipated loss or liability.

Amount

The amount of reserve depends upon the management policy and judgments.

The amount of provision cannot be accurately determined at the date of the balance sheet, though the liability is known.

Available For Distribution of Dividend

It can be used to distribute dividends among the shareholders.

It cannot be used to distribute dividends among the shareholders. 

Conclusion

In short, a reserve is an appropriation of profit or accumulated profit to strengthen the financial position of a business whereas provision is an amount that is kept aside to meet the expected loss/expense.

[Commerce Class Notes] on Difference between Balance of Trade and Balance of Payment Pdf for Exam

Globalisation has made the world a small place, and nowadays every country is free to transact with others. In this regard, two financial statements are prepared to keep the record of international transactions made by a country. These are called the balance of trade (BOT) and balance of payments (BOP). 

 

BOT keeps track of import and export of goods by a country with others; whereas, the BOP keeps track of every economic transaction made by a country globally. It can include goods, services, assets, etc.

 

Often these two terms are used interchangeably, but they do not share any similarities. Therefore, before discussing the difference between the balance of trade and balance of payment, you should know about these terms’ meaning and what they represent.

India has grown into a social upfront when it comes to the world market. Our country trades in humongous value with the other nations. Keeping track of all its transactions (export and import) done in a single year becomes mandatory. Thus, a system was launched which is known as Balance of Trade that calculates the export and import. Similarly, BOP or Balance of Payments was also initiated side by side which shows all the commercial transactions done by the country. 

In this context, we will discuss BOT (Balance of Trade) and BOP and their effect on our nation. 

Balance of Trade 

The term ‘trade’ refers to buying and selling of goods. However, when it is performed on an international scale, it is called imports and exports. BOT mentions the import and exports made by a nation’s economy within a specific year. BOT only records tangible items.

BOT portrays the variability of imports and exports made by a country during a period. In case a country achieves an equal status in terms of imports and exports, then this situation is regarded as Trade Equilibrium. However, if the former surpasses the latter, then it creates a Trade Deficit, which is not a favourable situation for a country. On the other hand, if the export value exceeds that of imports, then it creates a Trade Surplus, which puts an economy in a favourable situation.

Example of BOT

There is a country that is known for its cotton industry but lacks petroleum. Therefore, it imports oil from other countries and exports clothes and other cotton products to the rest of the world. In 2018, this country exported cotton products worth﹩40 billion and imported petroleum products worth﹩25 billion. Therefore, this country has registered a﹩15 billion trade surplus.

 

Balance of Payment

Balance of Payment is a combination of accounts that shows the commercial transactions concluded by a country within a specific period with other countries. These accounts reflect every monetary transaction, i.e., commodities, services, and incomes during that period.

The BOP combines every private and public investment to find out the money inflow and outflow in an economy over a specific period. The ideal status of BOP should be zero, which indicates that the money coming into the country is equal to the money going out of the country. However, this situation is highly unlikely. Therefore, if it is negative, then it indicates deficit, and if positive, it means a surplus. 

Balance of Payment is classified in the following accounts, these are –

  1. Current account: This account keeps a record of both tangible and intangible items. 

  2. Capital account: This account keeps the record of aggregate income generated by the public and private sector as well as capital expenditures. External commercial borrowing (ECB), loans to other governments, foreign direct investments are included here.

  3. Errors and omissions: In case payments and receipts do not tally then the balance will be presented as errors and omissions.

BOP is presented quarterly, half-yearly, or annually. Its main focus is to keep an eye on the flow of money within an economy and formulate policies accordingly. Apart from governments, companies can also prepare BOP for their business purpose.

Example of BOP

With regards to the previous BOT example, a country has imported petroleum products worth﹩25 billion and exported cotton products of ﹩40 billion. During the same period, that company has taken foreign aid of ﹩10 billion and made investments in a petroleum company of another country worth﹩5 billion.

Therefore, this country’s BOP for that period will be –

{﹩40 billion +﹩10 billion (total inflow) –﹩25 billion +﹩5 billion (total outflow)}=﹩20 billion Here the value of exported goods and foreign aid is included in ‘total inflow’, and the value of imported goods and foreign investment is under ‘total outflow’.

 

Difference between the Balance of Trade and Balance of Payment

Following are the major differences between the balance of trade and balance of payment –

BOT is a statement that records a country’s imports and exports of goods with other countries in a period. Whereas BOP records all the economic transactions performed by that country within a period.

A major difference between BOP and BOT is regarding the records they keep. Balance of Trade only records the physical items. On the other hand, Balance of Payment records physical items along with non-physical items.

The capital transfer is another significant difference between BOT and BOP. Capital transfers are only included in a Balance of Payment. BOP records all capital receipts and payments.

BOT can be positive, negative, and balanced. However, BOP shall always be balanced.

Another factor that distinguishes between the balance of trade and balance of payment is that BOT is a major part of a BOP. It is a component of a BOP’s Capital Account section.

Every country in the world keeps a tab on its economic activities with the help of BOP and BOT. They reflect the actual condition of a particular economy. However, BOT only reveals a partial picture, whereas BOP reveals the complete view of a country’s economy.

The difference between the balance of trade and the balance of payment is an important chapter of economics. Students who want to learn other chapters of economics and commerce can visit the official website of .

[Commerce Class Notes] on Double Entry System Pdf for Exam

Double-entry accounting refers to the method of bookkeeping which helps a company to maintain its account and keep it balanced which shows the true picture of the finances of the company. Double-entry refers to the use of an accounting asset which is a summation of liabilities and equity. The credits of an account should be equal to keep an equation in perfect balance. Accountants make use of the credit and debit entries so that they can record the transactions of all the accounts. All these credits and debits are shown in the Balance Sheet. 

Types of Accounts

All the day to day finally activities are recorded and measured by the accounting and bookkeeping process.  An event between two economic entities like between customer and business, or vendor and business-like known as a transaction. To record this event we use accounting and bookkeeping.

A systematic accounting process is a procedure under which the activities of the business are recorded under systematic accounts to keep data sorted and classified under different heads.

To classify all the business accounting entries  and transactions there are 7 main types of accounts, which are :

  • Assets

  • Liabilities

  • Equity

  • Gains

  • Losses

  • Expenses

  • Revenues

The continuous process of tracking changes in various types of accounts while continued business operations are known as accounting and book-keeping.

Double Account System

The meaning of the double-entry system is generally based on the Dual Aspect Concept. The Dual Aspect Concept is based on the fundamentals of accounting principles. All the transactions related to the business are recorded in the book which is specifically based on the principle of accounting. 


According to the Dual Aspect Concept, all business transactions have a two-way or dual effect. This tells us that the business transaction of the particular entity has a minimum of two accounts which are recorded in the books. This principle is known as the double-entry concept or system.

Single Entry System Meaning 

A single entry system refers to the form of bookkeeping where each company maintains its financial transactions in a single-entry log. The single-entry system does not involve any formal training and is usually based on new businesses because of its cost-effectiveness and simplicity. 

The single entry system records the description, date, transaction value, expenses and income, and lastly balance. This is maintained while doing every transaction for the company. It also includes income tax depending on the type of business. 

Who Uses A Single Entry System?

Small businesses use a single entry system. They record bare essentials only and the criteria for a company to be rendered fit for such a system are:

  • Having few employees.

  • Ones that use transactions based on cash

  • Very fewer transactions

  • Do not have an installment plan

  • Have fewer physical assets like equipment, buildings, and vehicles

Single Entry System and Double Entry System 

There are a few significant differences between the single entry system and the double-entry system. These are:

  • The single entry system tells about debtors, cash, and creditors’ cash balance only whereas the double-entry system tells about all the business entities

  • The records in the single entry system are only related to business. The records in the double-entry system affect all the transactions in the business. 

  • The single entry system has an incomplete way of maintaining transactions. In a double-entry system, it is difficult to carry out fraud. 

  • Errors cannot be easily found in a single entry system while errors can be easily detected in a double-entry system.

  • The single entry system is not accepted by the tax department but the double-entry system is accepted by the taxation department. 

Thus we have double-entry bookkeeping explained through this article.

[Commerce Class Notes] on Elasticity of Supply Pdf for Exam

The price elasticity of supply is a measure of the degree of responsiveness of the quantity supplied to the change in the price of a given commodity. It is an important parameter in determining how the supply of a particular product is affected by fluctuations in its market price. It also gives an idea about the profit that could be made by selling that product at its price difference. In this article, we will discuss the elasticity of the supply formula, different types of elasticity of supply, the supply curve characteristics, and many more. 

The price elasticity of supply refers to the response to a change in a good or service’s price by the supply of that good or service. According to basic economic theory, the supply of goods decreases when its price increases. 

Similarly, one can also study the price elasticity of demand. This illustrates how easily the demand for a product can change based on changes in price. Price changes fairly rapidly if the price of a product changes. This is known as price elasticity of demand. 

Price Elasticity of Supply Formula

After having understood the elasticity of supply definition in economics, we now move to the elasticity of supply formula which is based on its definition.

[E_{S} = frac{% Delta P}{% Delta Q}]

Here, [E_{S}] denotes the elasticity of supply which is equal to the percentage change in quantity supplied divided by the percentage change in the price of the commodity. 

The Law of Supply

Since producers compete for profits in a free market, profits are never constant over time or across different goods. Entrepreneurs, therefore, shift resources and labor efforts towards products that are more profitable and away from those that are less profitable. 

The law of supply refers to the tendency for price and quantity to be related. For instance, assume that consumers demand more oranges and fewer apples. More dollars are bidding for oranges, but fewer for apples, resulting in higher orange prices.

5 Types of Elasticity of Supply

Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit elastic supply, less than unit elastic, and perfectly inelastic. Read below to know them in more detail. 

  1. Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of supply is infinite. This means that even for a slight increase in price, the supply becomes infinite. For a perfectly elastic supply, the percentage change in the price is zero for any change in the quantity supplied.

  2. More than Unit Elastic Supply: When the percentage change in the supply is greater than the percentage change in price, then the commodity has the price elasticity of supply greater than 1.

  3. Unit Elastic Supply: A product is said to have a unit elastic supply when the change in its quantity supplied is proportionate or equal to the change in its price. The elasticity of supply, in this case, is equal to 1.

  4. Less than Unit Elastic Supply: When the change in the supply of a commodity is lesser as compared to the change in its price, we can say that it has a relatively less elastic supply. In such a case, the price elasticity of supply is less than 1.

  5. Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the percentage change in the quantity supplied is zero irrespective of the change in its price. This type of price elasticity of supply applies to exclusive items. For example, a designer gown styled by a famous personality.

The point to be noted is that the elasticity of supply is always a positive number. This is because the law of supply states that the quantity supplied is always directly proportional to the change in the price of a particular commodity. This means that the supply of a product either increases or remains the same with the increase in its market price. 

Determinants of Price Elasticity of Supply

  • Marginal Cost- As the cost of producing one more unit is rising with output or Marginal Costs (which are the increased costs related to each additional unit produced) are rising rapidly with output, then the rate of output production will be limited, i.e Price Elasticity of Supply will be inelastic., which means that the percentage of quantity supplied changes less than the change in price. However, if Marginal Cost rises slowly, then Supply will be elastic.

  • Time- As the price elasticity of supply increases over time, producers would increase the quantity supplied by a greater percentage than the price increases.

  • Number of Firms- It is more likely that the supply will be elastic when there are a large number of firms. This occurs because other firms can step in to fill the supply gap.

  • Mobility of Factors of Production- When the factors of production are mobile, then the price elasticities of supply are higher. This means that labor and other manufacturing inputs may be imported from other regions to quickly increase production.

The Elasticity of Supply Curves

We have previously inferred the elasticity of supply definition, the elasticity of supply formula, and its various types. Let us now have a look at how these different values of the price elasticity of the supply formula are plotted on the graph. 

Keeping the quantity supplied on the X-axis and the price of the commodity on the Y-axis, we can draw certain conclusions from the different values of elasticity of the supplied formula. 

  • When [E_{S}] = infinite (Perfectly elastic supply), the curve (SS) is a straight line parallel to the X-axis. 

  • When [E_{S} > 1], a flatter curve ([S_{2}S_{2}]) is obtained which when extended intersects the Y-axis.

  • When [E_{S} < 1], it results in a steeper curve ([S_{3}S_{3}]), which when extended crosses the X-axis.

  • When [E_{S} = 1], the curve ([S_{4}S_{4}]) comes out to be a straight line that passes through the origin at an angle of 45 degrees. 

  • When [E_{S} = 0] (Perfectly inelastic supply), the curve ([S_{1}S_{1}]) obtained is parallel to the Y-axis.  

This graph shows us the relationship between the different types of elasticity of supply and helps in understanding the elasticity of supply definition better. 

Did You Know?

Alfred Marshall, a British economist, gave the concept of elasticity of demand and supply in his book “Principles of Economics” in 1890. He was the one to define the elasticity of supply and deduced the price elasticity of the supply formula. He also explained that the prices of some goods such as medications, salt, gasoline, etc. can increase without reducing their demand in the market, which means that their prices are inelastic. This is because these goods are crucial to the everyday lives of consumers.

[Commerce Class Notes] on Environment of Decision Making Pdf for Exam

It’s said that the primary role of any manager is decision-making. Managers take a sequential series of actions to make sound choices that are in the company’s interest. This method is known as the process of decision making. The atmosphere of decision making, however, is also an essential factor in this process. Let us learn some crucial aspects of decision making.

We often face circumstances in our everyday lives where we need to make choices. Making a decision is not a simple task; you will be badly affected by a wrong decision while making the right decision will favour you and support you. 

Decision Making and Choice

Decision-making is the thought process of selecting a choice between the options available. When we settle on a choice, it is a goal to eliminate any doubt and hesitation. Typically, the best decisions are the decisions that will bring successful outcomes. We need to look at both the positive and negative aspects of each choice when making decisions. Before making a decision, we should always think of all the alternatives and weigh them wisely. 

It is possible to consider decision-making as the mental processes (cognitive process) that lead to choosing a course of actions between many alternative scenarios. Any decision-making process generates a final choice. An act or an opinion of choice may be the product of decision-making.

The ability to predict the outcome of the choices available is essential to make the right decision. The steps involved in the decision-making process are:

  • Define the Problem

  • Determine Requirements

  • Establish Goals

  • Identify Alternatives

Step 1. Define the Problem

Collecting all the relevant data and determining the intent and root causes of a problem is the first step in defining a problem. Our aim at this stage is to obtain a conceptual description. This abstract definition will be used as a basis that we can later redefine and form. However, this does not mean that we are just looking at a part of the picture or just a wild guess.

Step 2. Determine Requirements

At this point, the specifications and conditions needed to solve the problem are decided by us. Like a software upgrade, before it can be implemented successfully, some specifications must be met. This is to ensure that our shareholders’ interests are still secured by the solution that we are implementing.

Step 3. Establish Goals

Goals are the desired result that we would like to see in the outcome of decision-making. 

Determine the targets are merely setting a goal well in contrast to the minimum desires. 

Step 4. Identify Alternatives

And we’re finally defining all the alternatives. All of these alternatives must at least satisfy the minimum criteria we have previously determined. To see whether it meets the requirements or not, we must look at all the other options. Those alternatives which do not fulfil the requirement are omitted. We will end up with a couple of better options by doing this filtering. We can then compare and determine which is the better choice to choose from.

The ‘environment’ in which a decision is made is one of many factors that decision-making needs to evaluate alongside many others. 

Through this article, we examined three different types of decision-making environments and how to handle them effectively if you ever find yourself in one. There are different levels of complexity in each of them, and each has distinct features.

Additionally, we compared the different environments to each other, and, after sufficient research, we discovered that uncertain decision-making environments proved to be the most difficult to deal with and the riskiest ones to make decisions in.

Making different types of decisions is a result of the environment and is highly influenced by it. Leadership is about making better decisions using the information available and resources at your disposal.

Types of Decision Making Environment

We can experience several times in decision-making where we don’t have the necessary information to decide and keep hesitating. It’s often a decision that we have a lot of data with the circumstances and are very specific. There are three types of settings for decision making that we can define. There are also –

  • Decision Making in Certain Conditions

  • Decision Making in Uncertain Conditions

  • Decision Making in Risky Conditions

Decision Making in Certain Conditions

Decision-making under such circumstances ensures that the person who makes a decision has all the complete and appropriate knowledge for the decision to be made. With all the data available, the individual can predict the outcome of the decision. We can easily create a particular decision with confidence by being able to predict the result. Typically, the product that gives the best outcome will be used and carried out.

Decision Making in Uncertain Conditions

When you are unaware of the situation, making a decision is similar to the absence of information to help us decide. The decision-maker doesn’t know the future because of inadequate knowledge and can’t predict the outcome of any choice he has. The decision-maker will have to judge and decide based on their expertise to decide under certain circumstances. They have to communicate and seek advice from people who have more experience if they do not have those experiences. However, there is a slight risk involved because we cannot predict the outcome, but knowledge from the past will close the gap.

The success or failure of the said company would be determined by the nature of the decisions made in it. So before making an important decision, all the knowledge and alternatives available must be studied. The decision-making process will help a great deal. The atmosphere in which they are made is another aspect that impacts these decisions. In which these choices are made, there are a few different types of environments.  

[Commerce Class Notes] on Expenditure Method Pdf for Exam

The Expenditure method is a system used for determining the Gross Domestic Product (GDP) of a country. This method considers consumption, investments, net export, and government Expenditure to calculate a nation’s annual GDP.

 

Expenditure method of National  Income can be considered as the most common way to calculate GDP as it includes both public and private sector expenses incurred within a nation’s borders. However, this system can only be used to calculate nominal GDP, which is not adjusted for inflation.

 

Do you know: This method is also often referred to as the ‘Income Disposal Method’.

 

How is GDP Determined?

The process of calculating GDP with the Expenditure process is similar to that of determining demand as the total spending of an economy is considered as aggregate demand. For which reason, both Expenditure and aggregate demand shifts in tandem with each other.

 

However, aggregate demand usually considers the average price of all goods and services produced and utilized in an economy. That makes it similar to GDP only in the long run, after adjusting for inflation.

 

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Expenditure Formula

There are primarily four different types of aggregated expenses that are utilized to determine GDP. These are –

  1. Investments made by businesses.

  2. Government expenses on goods and services.

  3. Household consumption.

  4. Net export (total exports minus the value of imported goods and services).

 

The Expenditure Method Formula is as Following – 

[GDP = C + I + G + (X – M)]

 

Here, C is consumer spending on different goods and services, I represents investments made by businesses, and on capital goods, G represents government’s spending on goods and services provided to the public, X is exports, and M is imports.

 

Task for you: With the above mentioned Expenditure formula, determine India’s GDP for the financial year of 2018-2019

 

Primary Components Used in Expenditure Method of Calculating National Income

The above mentioned types of aggregated expenses can be further broken down depending on the parameters these include. Let’s take a look – 

  1. Consumer Spending – Consumer spending usually accounts for a large part of a nation’s GDP. It can be divided into two categories – purchases of durable and non-durable goods, and procurement of services. 

Consumer spending includes expenses incurred by individuals residing within the domestic territory, or abroad. For example, expenses made during one’s foreign travel will also be added to consumer spending.

However, it does not include any expenses incurred by foreign visitors in India.

  1. Government Expenditure – It represents expenses undertaken by both State and Central authorities for providing infrastructure, essential commodities, and other requirements to the general populace. Expenditure method of measuring National Income also includes expenses made towards education, healthcare, and defence industry.

  2. Business Investment – Business investments include capital Expenditures on assets by different organizations.

Business investment can be divided into two categories – 

  • Gross Fixed Capital – It indicates expenses incurred during purchase of fixed assets. Gross fixed capital can be further categorised into two types.

    • Gross Business Fixed Investments – It includes expenses made towards long-term assets, such as machinery, real-estate, production facility, infrastructure, etc.

    • Gross Residential Construction Investments – Expenses incurred by businesses for purchasing or constructing residential units upon receiving tenders. 

  • Inventory Investment – Investments made towards the acquisition of raw materials, semi-finished or finished goods are included in this category of Expenditure. These are considered as items that cannot be utilised for current consumption. Inventory investment is determined by calculating the closing stock balance and opening stock balance at the end of each year.

  • Net Exports – The difference in valuation between the exports and imports undertaken by a country within one financial year is considered as net exports. Exports are considered an output of an economy whereas imports are considered as Expenditures as they are not produced within a country’s National boundaries. Instead of calculating these factors separately, the difference is considered as the net export.

Task for you: Can you categorize the goods and services that India exports overseas? Name the five most high-volume export items.

 

Precautions Considered While Using Expenditure Method of National Income

Students should keep in mind several factors while using the Expenditure method of calculating National Income. These include – 

  1. Any expenses on account of intermediate goods cannot be considered to determine a nation’s Income as these expenses are already included in the value of final goods produced. Otherwise, it will lead to double-counting of a single Expenditure, thus inflating National Income inaccurately.

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  1. Any transfer payment should not be included under the Expenditure formula as these payments do not add any value to a nation’s economy.

  2. Purchase of any second-hand goods is not included in the total Expenditure method as these do not affect the total value of goods and services produced. However, any brokerage paid on the purchase of such goods or services has to be included in the calculation.

  3. Procurement of assets such as shares, bonds, debentures, etc. is also not included in the calculation as these represent changes in ownership instead of changes in goods and services’ values. Contrarily, any brokerage earned on the trading of shares will be considered as a productive service.

  4. Any expenses incurred due to producing goods for self-consumption, services provided by the government and non-profit institutions (that serve households) are also included in the National Income. Moreover, imputed values of occupied residential units are also considered as a productive service; hence those are considered in the National Income.

To learn more about the Expenditure method, its formula, and its different factors refer to our study materials today. Learn through a series of interactive courses and curated Q&As crafted by our skilled mentors to sharpen your knowledge. Also, don’t forget to install ‘s app for instant access to all our content.

 

Expenditure Method

Students must have understood the Expenditure method, how is GDP determined, the formula, primary components and the precautions that are taken while calculating. 

Since it is a mix of theory and practical, students are advised to follow an effective strategy for preparation so that they are able to achieve the goals in terms of marks that they have set for themselves.  

Accounts is a very interesting subject. Reading the theory of accounts is not similar to reading the ones of history or biology. This subject needs a lot of practical knowledge and understanding, you may always try to look for the logic and practical reasons behind it. Accounts also contain some mathematical calculations. The chapters of accounts are interrelated, you may find the same concept in chapters 2 and 7. So you do not leave any concept and go forward in order. Also, it is emphasised that you should be clearing your doubts at the source, carrying forward them could lead to more confusion and more weak areas. 

You should always do all the accounting homework given to you without fail. Make sure that you do not miss any homework and make all the efforts to complete it. Only practice is the key to ace in a subject like accounting. Working on your homework problems may teach you the concepts. It would be better if you understand that if you can’t work on your problems without referring to the textbook you should practice more as you are not yet ready for your next exam. In simpler words, it means that you shall be able to solve the problems without keeping the formula chart in front of you. 

Another key to ace in this subject is being regular in the class. Try your best to attend all the classes and give your best. Another thing that you should keep in mind while going to the class is that you should be well prepared before you go to the class. This will help you get the best out of the class and will increase your participation also. It works on a simple logic that if you don’t listen, you don’t register and that way, you won’t understand. That is why it is important to be regular in your classes and pay heed to whatever is being taught. 

Focus on understanding, not memorizing. Focusing on understanding helps you memorize automatically. But if you just memorize and don’t understand, it is a waste of time and energy. You may try to focus on learning and have a better understanding of concepts and not on cramming the textbook material. 

Maintaining speed in the test of the subject like accounts is a must. You should try to keep your pace during the exam as most of the tests are of a certain time limit and it needs to be completed while heed, efforts and within the given period. You shall not slow down while performing the exam. The best way to do that is trying to attempt a lot of sample papers at home and setting time boundaries for the same. 

When you think about one thing that helps you grow as a person every single day, what comes to your mind? 

Somebody who can transform your journey in unimaginable ways is only a mentor.

Whether it’s about motivating you to get out of your comfort zones or pushing you to learn new things or giving valuable advice or supporting you- as solid as rock— a good mentor can do it all for you! 

However, choosing someone to be a right mentor for you can be a tricky task to do, for many of you. So, before you take this important decision— make sure you research well and then, decide. 

Now, before you dig deeper into this subject, I would like you to take an insight of the best learning platforms- ! 

It’s about accelerating your careers, Choose Wisely!