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What is Economics

There's no one universally accepted answer to the question "What is economics?" Various definitions are:

The Economist's Dictionary of Economics defines economics as "The study of the production, distribution and consumption of wealth in human society."

"Most simply put, economics is the study of making choices."

"Economics is a social science that studies human behavior. Economics has a unique method for analyzing and predicting individual behavior as well as the effects of institutions such as firms and governments, or clubs and religions."

"Economics is a social science that studies human behavior as a relationship between ends and scarce means which have alternative uses (Lionel Robbins, 1935). That is, economics is the study of the trade-offs involved when choosing between alternate sets of decisions."

“Economics is the Social science devoted to studying the production, distribution, and consumption of wealth.”
Another definition is "Economics is the study of how individuals and groups make decisions with limited resources as to best satisfy their wants, needs, and desires". This definition is perhaps better suited to Microeconomics, but it gets the important idea across that economics is not simply the study of money and the stock market.

Economics is the study of how, in a given society, choices are made in the allocation of resources to produce goods and services for consumption, and the mechanisms and principles that govern this process. Economics seeks to apply scientific method to construct theories about the processes involved and to test them against what actually happens. Its two central concerns are

• the efficient allocation of available resources and
• the problem of reconciling finite resources with a virtually infinite desire for goods and services.

Economics analyzes the ingredients of economic efficiency in the production process, and the implications for practical policies, and examines conflicting demands for resources and the consequences of whatever choices are made, whether by individuals, enterprises, or governments.

It very broadly consists of the disciplines of microeconomics (the study of individual producers, consumers, or markets), and macroeconomics, (the study of whole economies or systems – in particular, areas such as taxation and public spending).

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KK

Depriciation & Ammortisation

Importance of depreciation – Depreciation as seen under “Accounting Concepts” is to make a provision out of the income of the enterprise every year to take care of requirement of funds for replacing an old asset as and when it is worn out. Depreciation is an important tool in tax planning, as to the extent of depreciation claimed in business, the profits are less and so is tax. Thus depreciation is necessary for tax planning.

Depreciation also provides funds to the enterprise, as there is no cash outlay in this case, unlike other operating expenditure involving cash outlay. Again depreciation fund is not kept in any bank account, but invested in business assets only. Depreciation funds can be used along with internal accruals for repayment of loan installment.

Amortisation – There are certain expenses incurred in a business enterprise, like patent registration fees, copyright fees, franchise fees, preliminary expenses representing company incorporation expenses, public issue of debt or equity expenses like debenture and share capital etc. These are called deferred revenue expenditure as they are incurred at one point of time and get written off over a period of time against future income, unlike revenue expenditure that gets written off during the year in which it is incurred.

Further, these expenses give benefit for a long time to the enterprise but do not generate tangible assets. Hence they are also referred to as “intangible assets”.

Opportunity cost and opportunity gain

Opportunity cost and opportunity gain – A phenomenon arising out of comparison between returns on alternative investment opportunities available to an investor.

For example an investor gets return of 13% p.a. in bank deposits, while he can get 18% in shares, the opportunity cost of investing in bank deposits vis-à-vis the investment in shares is 18% - 13% = 5%. As against this, the investment in shares fetches an opportunity gain of 5% p.a. Thus opportunity cost and gain are relative terms and absolutely dynamic, as the returns even in the case of same investment vary from time to time.
Opportunity cost or gain is a dynamic concept and not static one. Further it is a product of time and holds good only for a short period. It is always determined for a pair of alternative investment opportunities.

Cash Flow(Basics)

Cash management is usually done on the basis of cash inflow and cash outflow. The cash receipts and cash expenditure are reflected in a statement called “cash flow statement”. This statement can be prepared at a predetermined frequency, say every day, every week, every fortnight or every month. Usually it is not prepared at a frequency, which is less than a month. It has revenue receipts, revenue expenditure, capital receipts and capital expenditure unlike profit and loss account, which has only revenue items of income and expenditure. The details of revenue receipts/revenue expenditure and cash receipts/cash expenditure are given in the following points:


Revenue Receipt – Receipt from operations unlike capital receipt like sale of a capital equipment etc. Usually a period of 12 months is taken as the period in which revenue receipt should occur.

Revenue Expenditure – Expenditure for operations unlike capital expenditure like purchase of machinery etc. Usually a period of 12 months is taken as the period in which revenue expenditure should occur.

Capital Receipt – Receipt from owner in the form of capital or loans from lenders which need not be repaid within 12 months. Generally all sources, which go in for purchase of capital assets, are called capital receipts.

Capital Expenditure – Expenditure towards purchase of capital assets or repayment of an earlier capital receipt.

Difference Between Cash & Fund

            Cash means “money” and does not include credit or kind.   

     Fund includes every thing like credit or kind.  

     For example, a supplier supplies material on credit for which payment is not made immediately.  Till the payment is made by us, the supplier has given us money’s worth of goods.  Similarly services would also be provided.  Thus fund could mean, either “physical cash” or “credit” for supply of goods or services.  Hence, at times, the term “fund” also refers to money or money’s worth (OR) cash or kind. 

Another example is in case capital is brought into an enterprise in a form, other than cash; say in the form of land or building or machinery or vehicle.  This is also fund but would not fall under the category of cash.

Glossary of Finance Terms (Basics)

Asset	The property of the business entity such as land, building, stocks etc.  Usually split into current assets, i.e., working capital assets and long-term assets, i.e., fixed assets
Balance Sheet	A summary picture of what the business owns, i.e., assets and what it owes, i.e., liabilities as on a particular date.  Usually balance sheet is prepared at the end of one year.  However it can be prepared as at the end of every month also.
Capital	Normally means permanent or long-term funds of the business – introduced by the owners of the enterprise and/or borrowed in the form of long-term loans from banks and financial institutions.  In the case of a limited company, the owners’ capital is called share capital.  The borrowings are called debt capital.
Cash flow	This usually means a statement showing all cash inflow, i.e., cash receipts and cash outflow, i.e., cash expenditure.  The statement is prepared at least for a period of one month with the objective of monitoring cash flows in the business and managing liquidity.
Creditors	Persons to whom the business enterprise owes money due to goods or services supplied by them or for expenses.
Current asset	Working capital assets which enable a business enterprise to achieve what is known as sales revenue by the process of turn-over of the current assets.  Current assets constantly change form from cash back to cash through the activity of the firm, i.e., trading or manufacturing or service.
Current liability	Debt of the business enterprise which is to be settled within a period of 12 months.  They are also called short-term liabilities or working capital liabilities, like creditors, accrued expenses etc.
Debt	Money owed to external agencies, like loans, creditors etc.  This is classified into short-term, medium-term/long-term etc. depending upon the period of repayment as well as the purpose for which it has been incurred.  If it is for fixed asset, it is medium to long-term and if it is for working capital, it is short-term.
Debtors	The money that is owned by the business and owed to it by the customers to whom it has sold goods or supplied services on credit basis.
Depreciation	A charge against business income to enable a business enterprise to keep a certain % of the value of a fixed asset every year with a view to replace it at the required time.  It is a book or non-cash expense but is recognised as a business expense by the revenue authorities.
Dividend	Return to a shareholder in a limited company on its equity investment paid by the company out of its taxed profits every year and is often referred to as profit distributed to share holders.
Equity	Money brought in by the owners in the case of a limited company.  It is permanent investment in the company and is paid back to the owners only upon liquidation of the company.
Fixed assets	Long-term business assets, like land, building, machinery, vehicles etc. which act as catalysts in the activity of the enterprise but do not form a part of the finished goods of the manufacturing company or stocks in trade in the case of a trading enterprise.  They are subject to wear and tear and hence require replacement after some time.  Hence, the business enterprise claims depreciation on these assets and charges the amount to its revenue income.
Gearing	Same as leverage.  A measure of external debt in relation to the capital of the owners of the enterprise.  The higher the gearing, the greater the risk and vice-versa.
Inventory	Comprises materials like raw materials, consumables/ machinery spares and packing material, work-in-progress and finished goods.  Together with bills receivables, form bulk of current or working capital assets.
Insolvent	A business enterprise is considered insolvent when it is not able to pay its liabilities in full from the proceeds of its assets.
Liability	Amount owed by the business enterprise to outside agencies, which have provided resources either in the form of money, as in the case of bank over draft or goods as in case of creditors or services as in the case of accrued expenses.
Loss	Excess of expenditure over income in a particular accounting period.
Net current Asset	Difference between current assets and current liabilities.  This is called as Net working capital.
Net Fixed assets	Gross fixed assets (purchase price) as diminished by depreciation (cumulative).
Overdraft	A credit facility by which a customer of the bank can draw up to a pre determined limit against some tangible security like inventory or receivables or mortgage.
Payables	Also known as bills payables or money owed by the enterprise to various creditors.
Profit	An excess of sales revenue over expenditure.
Profit and loss Statement	A detailed and consolidated statement of all income and expenditure prepared at the end of a specific period, like month, quarter, half-year and year.  However, the revenue authorities are insistent on yearly statements and the other statements are meant for management purposes.
Receivables	Also known as sundry debtors or bills receivables or book debts.  Represent money owed to the enterprise by debtors.
Reserves or  Retained Earnings	Accumulated profits retained in business over a period of time. This is net of profit distributed in the form of dividend.
Returns	Either purchase returns or sales returns representing goods returned on purchases or sales due to defects which stand adjusted either in the amounts due from us or due to us or by replenishment of stocks with quality goods.  Purchase return is also called return outward and sales return is also called return inward.
Shareholders’	Share capital plus all kinds of reserves representing profit
Funds	retained in business over a period of time.
Solvent	Means that the business enterprise is able to meet its liabilities with all its assets.
Working capital	Gross working capital = Total current assets
Net working capital =	Total current assets (-) total current liabilities.