Category: Commerce Notes PPT

In the case of imperfect competition, a market structure is required, which comes in the form of monopoly and oligopoly. The sheer geographical size of the market can determine which structure exists. A particular company could control the industry in a specific area with no other alternatives, whereas other similar companies could choose to operate in other countries. This is the main difference between monopoly and oligopoly. Let us delve deeper into the three main market structures: monopoly, oligopoly, and monopolistic competition.

What is a Monopoly?

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Monopoly typically refers to a single company producing a product or providing service with no other substitute. This means that this company acts as a dominant force in its offerings. With enough power to ensure that other substituting establishments or institutions do not come close to their price points, services, and brand quality. Such companies stand as a force to reckon within the market structure. Monopolies usually exist to provide ultimate benefits to the consumer and often possess information that no other companies have.

What is Oligopoly?

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In such type of a market structure, a cluster of companies, which can range from two or more, control the demand in the market. This means that unlike in a monopoly, where only one company is the godfather, different establishments sell similar products to cater to the consumer in an oligopoly. The price points in such a market are often reasonable due to the competition, and the costings are often similar to the companies feed off of each others’ offerings to stay within that price range.  More often than not, companies tend to collude with their competitors instead of competing with them to ensure that an overall balance in the business remains.

Difference Between Monopoly and Oligopoly with Examples

Let us have a look at an example of monopoly oligopoly with relevant examples;

Example of Monopoly:

The country’s primary monopolies are government-run such as the Indian Railways (IR) – Lifeline of the nation. Due to the operation at minuscule economic scales, there is no room for another aspiring company to even begin to compete with IR. Not only that, additional restrictions issued by the government of India further prevent aspiring companies to even attempt to compete. This is a classic example of a monopoly.

Did you know? Your favourite fast-food chain McDonald’s is an example of a monopoly and the monopolistic competition in market structure.

Example of Oligopoly:

With a few powerful companies dominating smaller entrants, classic examples of oligopoly are airlines. Two of the top airlines, namely IndiGo and Air India, have taken over the airway world with their impeccable price points and services but offering similar benefits. They have the largest market shares and can often merge their services and prices to offer similar advantages for the consumers without wiping each other out, trying to outshine one another.

Did you know? Popular soda companies Coca-cola and Pepsi are examples of oligopoly.

Monopolistic Competition

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A market structure that combines the factors of monopoly, as well as other competitive markets, is termed as monopolistic competition. This type of market structure gives the freedom of entering as well as exiting at their convenience. This factor alone offers a malleable demand curve, allowing it to set its prices. However, this advantage can also lure more institutions to enter the market with the prospect of making higher profits. A few of the key features of monopolistic competition are:

• The entry of several firms.

• Complete freedom to enter and exit.

• Different companies offer different products.

• An inelastic demand resulting in curating comfortable price points.

• Normal profits can be achieved in the long term goal.

• Companies involved in such a market structure can be quite inefficient.

Some well-known monopolistic competition companies in India are ITC limited, Hindustan Unilever Ltd., and Procter and Gamble, among others.

In conclusion, the three market structures, namely, monopoly, oligopoly, and monopolistic competition generate large revenue for a different type of firms and companies looking to do business and make a profit as per their convenience. An oligopoly will allow more than one honcho to co-exist, and a monopolistic competition will allow several players to enter into the market, while a monopoly will essentially be the one that stands apart and rules the entire demand and supply chain in the particular field of selection.

Neoclassical theory (also referred to as human relations of thoughts) was introduced based on classical theory. It has added, modified, and in some way extended classical theory. The basic assumption of this theory is that the physiological and social aspects of a worker as an individual and his workgroup ought to be focused on. In classical theory, the organization emphasized order, structure, economic factors, formal organization, and objective rationality. Whereas neo-classical theory emphasized social factors and emotions at work.  Human relation is a general term that is frequently used to describe how a manager interacts with their employees. The importance of human relations is included in two aspects: The organization situation should be observed in social terms as well as economical and technical terms, and in terms of clinical method, it is similar to the doctor’s diagnosis of the human organisms.

What is Neo Classical Theory?

The Neoclassical approach was developed many years ago because it was believed that the classical theory did not achieve complete production efficiency and workplace harmony. Managers still observe the frustrations and difficulties because people always do not prefer to follow estimated or rational patterns of behavior.

Hence, there was a greater interest in assisting managers to deal more effectively with the “people side” of the organization. The neo-classical approach reflects a slight modification over the classical approach. 

The neoclassical approach identifies the importance of physiological and social aspects of workers as an individual and their relationships within and among the group of the organization. The Neoclassical Theory gained importance specifically in the rise of the “Hawthorne Experiment” at Western Electric Company by the father of human relation management named Elton Mayo from 1924 to 1932.

The Inception of Neo-Classical Theory

The neoclassical theory is the extensive version of the classical theory that includes behavioural science in business management. In this theory, the organization is the social system, and its performance is affected by human efforts.

The classical theory emphasized the mechanical and physiological variables and deemed them the primary factor in inferring its efficiency. However, when the efficiency was checked, it was found that the positive aspect of these factors did not evoke a positive response in work behaviour. 

Hence, the researchers tried to specify the reasons for human behaviour at a job. This eventually led to the arrangement of the neoclassical theory of economists. This mainly emphasizes human behaviour in the organization. This approach is often referred to as human relations or behavioural theory of organization. 

The neoclassical theory states that an organization is a mix of both informal and formal aspects of the organization. This aspect was ignored in classical theory. The organization’s informal structure is majorly formed due to the social interaction with workers; this affects and gets affected by an organization’s formal structure. Generally, disputes between the organization and workers often exist but this needs to be resolved immediately as the problems persist.

What are the Features of Neo-Classical Theory?

• Business Organizations are identified as a social system.

• Human factors are regarded as the most important elements in the organization.

• The theory revealed the importance of social and psychological factors in determining the worker’s productivity and satisfaction.

• The management aims to develop social and leadership skills along with technical skills. It must be done for the welfare of the workers and the organization.

• Morale and productivity work together in an organization.

Organization Structure in Neo-Classical Theory

The neoclassical writers offered the following organizational structure: 

Flat Structure: In the case of flat structure, the wide span of control in an organization helps in motivating the employees more effectively, a shorter chain of communication and it is free from hierarchical control.

Decentralization: Neo-classical theory adopted a decentralized organizational structure which is close to the flat structure due to the wider span of control. It permits autonomy and initiative at lower levels. It also encouraged people to occupy higher positions in the organization.

Informal Organizations: The neoclassical theorists emphasized the need for both formal and informal organizations. The formal organization indicates the motive of top management for interactions among the people. Informal organization is significant to promote the inadequacy of formal organization and to satisfy the social and psychological needs of people. The management uses informal organization for overcoming resistance to change on the part of workers and also for a fast communication process. Both formal and informal organizations are interdependent upon each other.

The Criticism of Neoclassical Theory

The assumptions on which neoclassical theory is formulated is sometimes not true. Thinking that there is always the possibility to find a solution that is acceptable to all is not always true. There are several conflicting interests among distinct groups that are merely structural and not physiological. This aspect is not covered in neo-classical theory. No specific organizational structure is suitable for all organizations. Various organizational formats introduced by the neoclassicists are not acceptable in all situations.

Neoclassical theory is only a modification of classical organization theory. It also suffered from similar drawbacks from which classical organization theory suffered. It lacked a unified approach to organization. This theory has been criticized by the fact it is nothing more than “ a commonplace of descriptive and empirical information as it has mainly relied on the Harthword Experiment”.

Fun Facts

• Neoclassical theory is based on the assumption that makes its structure irrelevant for different organisation situations. 

• This theory is a modified version of the classical theory that includes behavioural sciences in business management.

Conclusion

The neoclassical theory tried to overcome the drawbacks of classical organization theory. It introduced the concept of informal organization and the human behaviour approach in the study of organizational functioning. However, the neoclassical theory is also not free from several drawbacks. Like the classical theory of organization, the neo-classical theory is also suffered from incompetency, a short-sighted approach, and lack of integration among many facts of human behaviour studied by it.

Introduction to Government Budget

Government budget is an annual financial statement of estimated receipts and expenditure of the government during a fiscal year, as recorded in Article 112 of the Indian Constitution.  

In the beginning of every year, the Government of India prepares a document and presents it before Lok Sabha. It contains anticipated revenues and proposed spending for the upcoming financial year (which starts from 1st April and extends till 31st March of following year). Government budget primarily addresses monetary needs and problems of a country and how to resolve it.  

Budget is a crucial activity as it shapes economic development and progress of a nation. 

Do you know who presented the first Union Budget of independent India?

Elements of Government Budget

A few significant aspects of the Union Budget are

• It estimates capital receipts and revenues.

• Ways and means to raise revenues.

• Approximates total expenditure.

• Explains actual receipts and expenditure of the closing year and reasons for deficit or surplus in that year.

• Announces financial and economic policies for the upcoming year. These include spending programs, taxation upgradation, and proposals of new projects or government schemes.  

Task for you: Can a strong budget help reduce income inequality? If so, how?

Objectives of Government Budget

1. Economic growth- The overall economic growth of a nation relies on savings and investments. Budgetary policies are hence introduced to infuse enough recourse in different public sectors. Government makes provision to boost the rate of savings and investments made within the economy. 

2. Reallocation of resources- Through a budget, the government endeavours to equally allocate resources and wealth. They encourage small industries like “Khadi” to flourish by allowing subsidised loans and reduced taxes on raw material, needed for production. Government can also levy hefty taxes upon production of harmful products like cigarettes and alcohol to discourage the production of those.   

3. Redistribution of income- To close the income gap between rich and poor, several budgetary schemes are launched from the government’s end. Fiscal instruments like subsidies, taxations, etc. are effectively used to achieve this goal. 

4. Financial stability- Budget keenly focuses on lowering the price fluctuations in the market. Policies like Deficit budget during deflation and Surplus budget during inflation thrive on bringing stability within the economy. 

5. Bringing down economic inequality- The Government tries to bring economic equality of society. They do so by imposing taxes on the affluent classes of society and spending them for welfare of the economically weaker section of the community. 

Do you know – Higher tax rates on a certain group of nationals and organisations can have a severe impact on the overall economy. 

6. Financing Public Enterprises- Several public sector industries are established for the social welfare of the public. An annual budget provides financial aid to such businesses to grow. This objective organically strengthens the economic structure of a nation. 

7. Addressing Regional Disparity- One of the chief aims of the Government budget is to alleviate social disproportion. They achieve so by installing manufacturing facilities in the economically weaker section of the society. Also by producing goods and supply directly. 

Task for you – Identify the characteristics of a robust as well as weak budget using the above mentioned objectives

Types of Budget

Primarily the budget is divided into 3 types.

• Balanced Budget- Government’s budget is assumed to be balanced where anticipated expenditure is equal to the expected recipients in a financial year. It brings economic stability in a country by cutting down wasteful expenses. This can be expressed symbolically like, Balanced Budget = (Assumed collected revenues = Assumed expenditure)

• Surplus Budget- A surplus budget occurs when the estimated revenues exceed the expected expenditure. In this case, imposed taxes surpass the expenses. It means that the Government is taking more money under its control which leads to fall in prices.  

• Deficit Budget- A budget is in deficit if the expenditure of the government is higher than that revenue generated in a fiscal year. Symbolically, Deficit budget = estimated expenditure > estimated revenues.  

Significant Components of Union Budget

The two main components of government budget are

1. Revenue budget- It comprises revenue receipts and revenue expenditure of a government. These receipts are again classified into two segments: tax revenue (income, excise, corporate, custom taxes) and non-tax revenue (income and profits earned by government other than taxes).

2. Capital budget- Just like the former one, Capital revenue is classified into capital receipts and expenditure. Capital recipients are government liabilities (borrowings, disinvestments like shares of public enterprises). However, capital expenditure is long-term investments that the government makes by creating assets like building roads, hospitals etc.

Importance of Budget

It is essential for any government to plan a budget as it allocates various resources across the nation to ensure economic progress and stability. Apart from that, a few other important points of the government budget are listed below.

• It helps to uplift underprivileged sections of society by introducing new policies.

• Budget focuses on the advancement of defence capabilities.

• Allocates money for improving educational facilities.

• Successfully handles the economic infatuation of the country by balancing inflation and deflation.

• Aids in achieving financial and economic goals of a country.  

Impact of Budget

Since a budget is introduced to diminish any financial discrepancy within a country, its effects on society are far-reaching. 

• It brings discipline to fiscal planning through controlled expenditure, allocating several revenues. Based on budget, the government makes precautionary measures. 

• Government budget and its components assist in the redistribution of revenues based on social priorities.

• The budget includes effective plans and programs for conveyance of goods and services to achieve its target. 

Government Budget thus plays a crucial role in determining the rapid growth of a nation. If you want to learn more, check out our website today for more information about economics, finance and business study related topics. 

When the demand for a new issue of the stock exceeds the number of shares available, the term “oversubscribed” is used. When a new issue is oversubscribed, underwriters or other financial institutions selling the asset might raise the price or provide more securities to account for the higher-than-expected demand.

In contrast to an oversubscribed offer, where demand exceeds the available supply of shares, an undersubscribed issue occurs when demand exceeds the available supply of shares.

When a company decides to go public or issue new shares, it does so via IPO (Initial Public Hearing). That company asks for applications from buyers, and based on that; it allots shares.

However, in realistic scenarios, it is improbable that a firm receives the same number of applications equal to the shares issued. It is either oversubscribed or undersubscribed.

What is Oversubscription of Share?

Oversubscription of shares is a situation that occurs when a company receives more applications to purchase their shares compared to the number of shares that they have issued. It is a situation in which buyers show so much interest in a new stock that demand exceeds supply. 

Before issuing new shares, underwriters study the market to understand the number of potential investors, people who may or may not purchase these new shares. Based on such calculations, firms issue a fixed number of shares.

When investors order more than what has been issued, it creates an oversubscription. This situation of oversubscription of shares may affect the prices of an individual share. 

Thus, the issuing house or firm is responsible for dealing with this situation. They take the necessary measures to manage this scenario.

How to Deal With Oversubscription?

According to the guidelines of SEBI (Securities and Exchange Board of India), companies cannot reject applications outright. However, they can do so if there are any mistakes with the applications like –

• Incomplete information

• Absence of required documents

• Discrepancies with signature

• Submission of incorrect application amount.

• Last but not least, improperly filled application form

What are the Ways?

In a scenario of oversubscription, a company can’t fulfill the market demand. Therefore, opt for the following measure to counter this situation.

1. Pro-Rata Allotment

Pro-rata allotment means no applicant is rejected. However, they will not receive the desired amount of shares. Everyone receives shares according to the ratio of the total number of applicants/ total number of shares issued. 

For instance, ABC Ltd. is planning to offer 40,000 shares to the public via IPO. However, it receives 80,000 share applications. Therefore, the company opt for this method, where it has allotted the total shares to every applicant.

Thus, the ratio here will be 80,000:40,000, i.e. 2:1. Hence, every applicant for their application of two shares will now receive one share. Pro-rata allotment makes sure that every applicant receives at least some shares against their application.

2. Rejecting Applications

The easiest way to deal with over-subscription shares is to reject some applications. According to the SEBI guidelines, companies can do so if they find any incomplete applications. In such cases, the application money is refunded. For example, if a company receives 10,000 applications against their 6,000 share, it can reject the remaining 4,000 in case there are any discrepancies.

3. A Combination of Both

However, among the excess applications, not everyone makes a mistake and cannot be rejected on that ground. In such a scenario, a company opts for a middle ground. Here, firms accept the first set of applications in full. Amongst the remaining ones, shares are allotted on a pro-rata basis. 

For example, XYZ Ltd. is planning to release 20,000 shares in the market. However, they receive 30,000 applications against it. Therefore, in this scenario, this company can accept the first 20,000 applications in full and among the remaining 10,000 distribute shares to 6,000 as per a pro-rata basis. 

A Real-Life Example of Oversubscription of Shares

In 2012, market analysts indicated that Facebook is finally issuing its long-awaited IPO. The company was looking to raise around USB10.6 billion via 337 million shares. Prices of stocks were in the range of USB28 to USB35. Once this news broke, it created an enormous buzz in the market and resulted in an oversubscribed IPO. 

As a result, the company took advantage of this situation. It increases the number of shares from 337 million to 421 million. Additionally, it increases the share price to USB34 to USB38 per share. Thus, Facebook and its underwriters made the most of this situation generated more capital and increased its market valuation. 

Benefits of Oversubscription

Companies aim to make the most of it in a situation of oversubscription. They can manage this scenario via different techniques like increasing the number of allotted shares, rejecting applications, trying combinations of both, etc. They aim to meet market demand and raise as much capital as they can. 

How can a Company Issue More Shares?

Every company holds back a substantial amount of shares for a future capital generation or to distribute as management incentives. Therefore, firms can add further shares in case an IPO is oversubscribed. 

Share Price Management in an Oversubscribed IPO

In case the underwriters of the company can predict that there is enough buzz in the market about their IPO, they intentionally set the share prices low to sell all the shares. They do not want to be left with the remaining shares. Therefore, if there is any situation of oversubscription in the future, it leaves them with the scope of hiking up the share price.

However, universal trends show that oversubscribed shares are mostly under-priced to some extent. It allows a post-IPO hike in prices and robust trading of respective shares. 

Are there any Disadvantages of Oversubscription?

Well, a complaint against this situation is that investors often get snubbed. When firms cannot issue any more shares, they reject applications. On the other hand, investors often receive a lower amount of shares compared to what they have applied for.

 

Oversubscription of shares is a vital topic to cover for every commerce student. Apart from this, if they want to learn more about other topics of commerce, they can visit the official website of .

Key Takeaways of Oversubscription of Shares

• An oversubscribed stock offering is one in which the demand for the stock outnumbers the supply.

• An oversubscribed initial public offering (IPO) indicates that an investor may want to buy a company’s stock, resulting in a higher price and/or more stock being available for sale.

• The demand must eventually reconcile with the security’s underlying corporate fundamentals, therefore an overcrowded offering does not automatically indicate the market will support the higher price for long.

The Phillips Curve is an economic concept, and it has been proposed and initiated by A. W. Phillips to state the reasons for inflation and consequent unemployment. It will lead to the inverse and the stable relationship, and the theory claims the kind of insufficient economic growth, which can, in turn, lead to a more developed job structure leading to less unemployment. However, the authentic concept, as proposed by Phillips Curve, has been empirically disapproved due to the happening of stagflation in the years of 1970s. Here you can notice the high levels of both unemployment and inflation, and you are quite into the field, making ways for the experts. 

There are expectations augmented by Phillips Curve, and the concept is more innovative and encouraging of its kind. The curve is there to state the rate and reasons for unemployment and inflation and also talks about the inverse relationship of the same. The high rate of inflation has a connection with the lower rate of unemployment, and it can even be vice versa. Once you get to know what is Phillips Curve is, you can have a better understanding of the rate of inflation. 

What is Phillips Curve?

In trying to understand the concept of the Phillips Curve, you get to know about the change in the rate of unemployment within the specific economic setting. There are the expectations augmented Phillips Curve, and it is something that can have a conventional effect in matters of price inflation. It is all about the inverse relationship between inflation and unemployment, and the same is depicted in the kind of downward economic slopping. One can see the concave curve with the rate of inflation shown by the Y-Axis, and you even have the unemployment being depicted by the X-Axis. 

In the year 1960, there has been a fiscal stimulus that can help in increasing the aggregate demand and also helps in initiating the favourable effects. In the process, an increase in the amount of labour demand will help augment the pool of unemployment, and there is a subsequent decrease in the workers with the subsequent increase in the company wages. It is perfect to follow the Phillips Curve equation to attract the portion of the talent pool. The corporate cost of the wages can increase in time, and the companies will pass over those costs to most of the customers in the form of prices. 

A simple Phillips Curve equation can be represented as –

U = -h (unemployment – u)

[Pi = -h times (u -u_{n})]

A simple Phillips curve is typically represented with inflation as a function of employment rate and the hypothetical unemployment rate that would exist if inflation existed as zero. The inflation rate is represented by and the employment rate is denoted by ‘u’. The ‘h’ in the Phillips curve is a positive constant that guarantees that the curve slopes downwards. The ‘[u_{n}]’ is the natural rate of unemployment that would result if inflation was zero.

The Concept of NARU

There is an increase in the central bank inflation, and it can help in pushing the level of unemployment to the lower level, as depicted in the Phillips curve equation. There can even be an initial shift along the curve, causing an increase in the expectations of the workers. This will help the inflation get adapted to the new environment, and in the longer run, the curve can have an outward shifting, as you get to see in the Phillips curve PPT. However, things have a relation with NARU or the natural rate of unemployment. This can help in representing the normal rate of institutional and frictional unemployment as part of the steady economy. 

The concept will become better clear once you start following the Phillips curve diagram. Especially in the stage of stagflation, the workers and most of the consumers can start to have a rational expectation, and once again, this helps increase the rate of inflation, and with this kind of financial awareness, the money based authority will have plans to embark on expanding monetary policy. Based on the details of the Phillips curve PDF, you can have a better idea about the apt monetary policy with all the necessary fiscal inclusions. 

The Phillips curve in economics plays a major role in the probable monetary expansion. Several surveys have proved that the presentation of the Phillips Curve has made things clear in the field of finance. Once you check with the PDF and the diagram, you can see the vertical graph that will show you the rise in the graph and make you better aware of the possible economic growth and development. It is the genre where you can put your trading skills and get into depth with the Phillips curve example. This is sure to have the least effect on the reduced rate of unemployment, and this will make the curve acquire the vertical line. 

The entire concept of the Phillips curve is an indispensable part of Economics. It is imperative to have at least rudimentary knowledge of the subject to be aware of the several real-life economic phenomena that we experience and observe. Thus, this well-written article has comprehensively explained all the vital concepts related to the Phillips curve in economics.

In the process of accounting, an accountant is required to classify each expense and income and put it into a specific method and entry. This is done so that there is a definite procedure in the accounting system of the organization and the benefits of recording these entries are enjoyed. The benefits of a good accounting system include the correct estimation of provisions, calculation of net profit, and also giving a good glimpse of presentation.

In this context, we are going to discuss Prepaid Expenses, Accrued Income, and Income Received in Advance from an organization’s point of view.

Overview of the Income and Expenses

Expenses that are to be charged in the future or simply the future expenses that are paid in advance are known as prepaid expenses. In this, the benefit of the expenses being paid in advance is recognized. They are initially treated like assets their value is expensed over time onto the income statement.

Now, what is accrued income and income received in advance? Accrued Income is the income that is earned but not yet received. ‘Income received in advance, as the name suggests, is the earned revenue which is to be earned in the future in an accounting period but is already received in the current accounting period.

Prepaid Expense

A company prepaying for an expense is to be recorded as a prepaid asset on the balance sheet and is termed as ‘prepaid expense’. The entry is being simultaneously added with another entry (the payment account) that reduces the cash balance of a business unit. Prepaid expense, being an ‘expense’ is still recorded in the asset side of the balance sheet as this is an advanced payment for the goods and services to be received in the future.

According to the Generally Accepted Accounting Principles (GAAP), expenses should be recorded in the same accounting period as the benefit generated from the related asset. For example, a company uses leased machinery for twelve months, the company benefits from it over a full-time period. Recording an advanced payment made for the lease as an expense in the first month would not adequately match expenses with revenues generated from its use. Therefore, it should be recorded as a prepaid expense and allocated out to expense over the full twelve months. Are prepaid expenses debit or credit? Prepaid expenses represent prepayment of an expense and hence it is debited and the cash account is credited. This records the prepayment as an asset on the company’s balance sheet, such as prepaid insurance and debits an expense account on the income statement, such as insurance expense.

Accrued Income

Accrued Income is the income that has been earned but not yet received. Accrued Income is to be recognized in the accounting period in which it arises but not in the subsequent period when it is received. For the journal entry, the income is to be credited to record the accrued income and a related receivable is to be debited to balance the transaction. The accounting entry will be as follows:

Accrued Income is an accounting concept that is a situation where a profit took place but was not yet received in the hands of the receiver. This event is recorded as receivable on the books. The concept of accrued income is used under the accrual basis of accounting. Here, the income can be earned even when the cash has yet not been received.

Income received in Advance 

In some cases, the yet to be earned revenue belonging to a future accounting period is received in the current accounting period, then such income is considered as the ‘income received in advance’. This income is also called the Unearned Revenue, Unearned Income, Income Received but not Earned these names are because it is received before the related benefits that are being provided.

This revenue is not related to the current year’s accounting period, for example, the Rent which is received in advance, the Commission that is received in advance, all re income received in advance etc. This income is a personal account income and is shown on the liability side of a Balance Sheet.

Effect of These Expenses and Income on  Financial Statement

Firstly, to record prepaid expenses, the current asset is reduced and the amount of reduction is reported as an expense on the statement. These are the costs that have been paid but are not yet expired and hence as the amount expires, the current asset is reduced and this is recorded as an expense in the income statement (a type of financial statement).

Next comes the accrued income. In the financial statement, the right to receive such income is displayed in the balance sheet (another type of financial statement) in the current asset section. This will be termed as accrued receivables or accrued income. The accountant debits an asset account for accrued revenue which is reversed when the exact amount of revenue is collected crediting accrued revenue. In the income statement, accrued income is recognized as revenue. Another associated accrued revenue account on the company’s balance sheet is debited by the same amount, usually under accounts receivable.

Revenue received in advance or Income received in advance is received before providing any benefits. This unearned income is shown on the liability side of the balance sheet.

Profit and Loss Statement

When a company prepays for an expense, it is recognized as a prepaid asset on the balance sheet and it reduces the company’s cash (or payment account) by the same amount. The prepaid expense is deducted from the particular expense while preparing a profit and loss statement.

In the case of accrued income, it is to be added with the related income in the profit and loss account and a new account of the accrued income will be shown on the asset side of the balance sheet.

The unearned income which is received before the benefits are provided is to be shown on the liability side of the balance sheet. While preparing the trading account, we need to deduct the amount of income received in advance from that particular income.

Outstanding Expense

Outstanding expense is the exact opposite of prepaid expenses, outstanding expense means an expense that is due i.e not yet paid. A company or a business unit takes the benefit but the related payment is not paid so far and this event leads to the occurrence of an outstanding expense to incur. The expense is due. Examples of such an event of expense outstanding are as follows

1. Rent past due but not yet received

2. Bills passed due but not yet received 

3. Subscriptions passed due but not yet received

Outstanding expenses are to be recorded in the balance sheet on the liability side. This accounting takes place under the accrual basis of accounting. For example, wages earned by the employees are not recorded in the accounting records. This is to be entered through an accrual adjusting entry – debit wages expense, credit wages payable or credit accrued wages payable. 

Journal Entry for Outstanding Expense

Outstanding expenses are recorded in the books of finance at the end of an accounting period to show the true numbers of a business.

The subject matter discussed on prepaid expenses, accrued income and income received in advance is one of the core studies for accounts. A good grasp on the matter is beneficial as the expenses and the incomes together form a business transaction and a financial event to take place accordingly.