Tag: Methods

  • Introduction to Wages: Meaning, Definition, Types, and Methods

    Introduction to Wages: Meaning, Definition, Types, and Methods

    What does it mean by Wages? A fixed regular payment earned for their services typically paid on an hourly, daily or weekly basis. Wage compensation pays to employees for work for a company during a period. Wages or labor charges always pay based on a certain amount of time, the article explains below along with their topics Meaning, definition, types, and methods. For example; Employees who receive labor charges cannot also receive a salary, but they can receive a commission. A commission is a payment for a specific action. Commissions are most commonly found in the sales industry. Salesmen and women often pay a base wage and then paid a commission based on how many sales they make during a period.

    Know and Understand the Wages and their Introduction, Meaning, Definition, Types, and Methods.

    Lower-level employees pay based on the amount of time worked. These employees usually have a timesheet or time card to keep track of the hours worked per week. Most modern employers have computerized systems to keep track of hourly employee hours. Employees must log into the system and log out to record their hours worked. Depending on the state, these employees then pay once a week or once every other week. Hourly employees must receive overtime benefits if they work more than 40 hours each week.

    Meaning of Wages:

    Wages are the reward paid to the worker for his labor. The term “labor”, as used in Economics, has a broad meaning. It includes the work of all who work for a living, whether this work is physical or mental.

    It also includes the exertions of independent professional men and women like doctors, lawyers, musicians and painters who render service for money. In fact, “labor” in Economics means all kinds of work for which a reward is paid. Any type of reward for human exertion whether paid by the hour, day, month or year and paid in cash, kind, or both call labor charges.

    Definition of Wages:

    Here are below the definition of wages defines by different authors.

    According to Benham;

    “A wage may be defined as the sum of money paid under contract by an employer to the worker for services rendered.”

    According to A.H. Hansen;

    “Wages is the payment to labor for its assistance to production.”

    According to Mc Connell;

    ‘Wage rate is the price paid for the use of labor.”

    According to J.R. Turner;

    “A wage is a price, it is the price paid by the employer to the worker on account of labor performed.”

    Types of Wages:

    Labor charges typically paid on an hourly, daily or weekly basis. In real practice, wages are of many types as follows, and also you’ll understand their methods below are:

    1] Piece Wages:

    Piece wages are the wage paid according to the work done by the worker. To calculate the piece wages, the number of units produced by the worker takes into consideration.

    2] Time Wages:

    If the laborer pays for his services according to time, it calls a time wage. For example, if the labor pays a dollar $5 per day, it will term as a time wage.

    3] Cash Wages:

    Cash wage refers to the labor charges paid to labor in terms of money. The salary paid to a worker is an instance of cash wages.

    4] Wages in Kind:

    When the laborer pays in terms of goods rather than cash, it calls the wage in kind. These types of wages are popular in rural areas.

    5] Contract Wages:

    Under this type, the wage fixes at the beginning of complete work. For instance, if a contractor tells that he will pay a dollar $5,000 for the construction of the building, it will term as contract wage.

    Understand the Nominal and Real Wages.

    The money paid to a worker as a reward for his work knows as a nominal wage. But what money wants for? Obviously for the goods and services it can buy. By ‘real wage’, we understand the satisfaction that a laborer gets from spending his money wage in the form of necessaries, comforts, and luxuries. It means the total benefits, whether in cash or kind, that a worker enjoys by working at a certain job.

    The following are the two main concepts of wage:

    • Nominal Wage.
    • Real Wage.

    Now explain;

    1] Money or Nominal Wages:

    The total amount of money received by the laborer in the process of production calls the money wage or nominal wage. The nominal or money value of labor charges express at current prices and is not adjusted for the effects of inflation. In contrast, the value of the wage or earning that someone earns each year expresses at constant prices and therefore have been adjusting to taking into account price changes.

    2] Real Wages:

    Real wages mean the translation of money wage’s into real terms or in terms of commodities and services that money can buy. They refer to the advantages of worker’s occupation, i.e. the amount of the necessaries, comforts, and luxuries of life which the worker can command in return for his services. An example will make things clear. Suppose “A” receives Dollar $100 p.m. as money wage’s during the year.

    Suppose also that midway through the year the prices of commodities and services, that the worker buys, go up, on average, by 50%. It means that though the money wage remains the same, the real wages (consumption basket in terms of commodities and services) reduce by 50%. Real wage’s also included extra supplementary benefits along with the money wage.

    Introduction to Wages Meaning Definition Types and Methods
    Introduction to Wages: Meaning, Definition, Types, and Methods, #Pixabay.

    Understand the Methods of Wage Payment.

    From the payment, wage’s can classify as:

    • Cash wages or wage’s in kind, according to as the payment makes in cash or kind.
    • Time wages, when the wage rate fixes per hour, per day or month.
    • Piece wages, when the worker pays according to the work done, and.
    • Task wages, which is a payment on a contract basis, i.e., payment for finishing a specified job.

    Wage’s give different names, e.g., salaries for the higher staff, pay to the lower staff like clerks and typists, wage’s for the workers, fees for persons in independent professions like lawyers and doctors, commission for middlemen, brokers, etc., and allowance for special work or special reasons, e.g., traveling allowance, dearness allowance, etc.

  • What does Monopoly mean? Understand Monopoly control Methods.

    What is the Monopoly? The word Monopoly has been derived from the combination of two words i.e., “Mono” and “Poly”. Mono refers to a single and poly to control. “Mono” means one and “Poly” means seller. A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. Thus monopoly refers to a market situation in which there is only one seller of a particular product. This means that the firm itself is the industry and the firm’s product has no close substitute. So, what is the question we are going to discuss; What does Monopoly mean? Understand Monopoly control Methods. Read in Hindi.

    Here are explained What does Monopoly mean? after Understand Control and Regulation of Monopoly Methods.

    The monopolist is not bothered by the reaction of rival firms since it has no rival. So the demand curve faced by the monopoly firm is the same as the industry demand curve. In this way, monopoly refers to a market situation in which there is only one seller of a commodity.

    There are no close substitutes for the commodity it produces and there are barriers to entry. The single producer may be in the form of an individual owner or a single partnership or a joint-stock company. In other words, under monopoly, there is no difference between firm and industry. The monopolist has full control over the supply of the commodity.

    Having control over the supply of the commodity he possesses the market power to set the price. Thus, as a single seller, the monopolist may be a king without a crown. If there is to be the monopoly, the cross elasticity of demand between the product of the monopolist and the product of any other seller must be very small.

    Can there be the complete monopoly in the real commercial world? Some economists feel that by maintaining some barriers to entry a firm can act as the single seller of a product in a particular industry. Others feel that all products compete for the limited budget of the consumer. Therefore, no firm, even if it is the only seller of a particular product, is free from competition from the sellers of other products.

    Thus complete monopoly does not exist in reality. The monopolist is the sole seller of a particular product. Therefore, if the monopolist is to enjoy excess profit in the long run that must exist certain barriers to the entry of new firms into the industry. Such barriers may refer to any force which prevents rival firms (competing producers) from enter­ing the industry.

    Learn Control and Regulation of Monopoly:

    There are three methods of controlling and regulating monopoly:

    First, the government may adopt anti-monopoly laws and restrictive trade practices legislation. Second, the government may either run natural monopolies directly or regulate monopolies by imposing price ceilings. Third, the government may regulate monopolies through taxation.

    Besides, there are certain fears that prevent the monopolist from charging a very high price in order to earn large super-normal profits.

    They are discussed as under.

    Fear of Potential Rivals:

    The fear of potential competitors may prevent a monopolist to charge a very high price to his customers. If he sets a very high price, he will earn large super-normal profits. Attracted by these monopoly profits, new entrants may force themselves into the monopolized industry. The monopolist, being averse to the entry of new firms, would prefer to charge a reasonable price and thus earn only a modest profit.

    Fear of Government Regulation:

    The same consideration applies to potential government regula­tion. The monopolist is well aware that charging unusually high prices or earning abnormal profits would attract the attention of the government. Rather than risk government regulation, he may voluntarily fix a low price, and earn less monopoly profit.

    Fear of Nationalisation:

    The fear of nationalization also prevents the monopolist to wield absolute monopoly power. If the product or service which the monopolist provides is a public utility service, there is every likelihood of the state taking over the monopoly organization in public interest. This consideration may prevent the monopolist from charging too high a price.

    Fear of Public Reaction:

    The monopolist is also aware of public reaction if he charges a very high price and earns huge profits. Voices may be raised against the monopoly firm in parliament to press for anti-monopoly legislation.

    Fear of Boycott:

    People may even boycott the use of monopolized service and start their own service instead. For instance, if in a big city taxi operators combine to charge high rates, people may boycott taxi service and even start operating their own services by forming a cooperative society. Naturally, such a fear compels monopoly firms to charge reasonable prices and earn only nominal profits.

    Fear of Substitutes:

    Then there is the fear of substitutes. In fact, the fear of substitutes is the most potent factor which prevents monopoly firms from charging very high prices and thereby earn super-normal profits. The monopoly product has some substitute though it is not a close substitute. Therefore, the fear of the emergence of very close substitutes is always uppermost in the mind of the monopolist which acts as a restraint on his absolute power.

    Differences in Elasticities of Demand:

    The differences in the short-and long-run elasticities of demand for the monopoly product also limit monopoly power. In the short-run, the monopolist can charge a very high price because customers take time to adjust their habits, tastes, and incomes to some other substitutes.

    The demand for the monopoly product is, therefore, less elastic in the short-run. But in the long-run, the fear of public opinion, the emergence of substitutes, government regulations, etc. will force the monopolist to set a low price. He will view his demand curve as elastic, and sell more at a low price.

    1. Control of Monopoly through Legislation:

    Government tries to control monopoly by anti-monopoly laws and restrictive trade practices legislation.

    These measures tend to:

    • Remove restrictive trade practices and fixation of high prices.
    • Reduce the incidence of market-sharing agreements.
    • Remove unfair competition.
    • Restrict the control of a very large share of the market.
    • Prevent unfair price discrimination.
    • Restrict mergers in order to avoid market domination, and.
    • Prohibit exclusive agreements between the producer and retailer to the detriment of other traders.

    2. Control of Monopoly through Price Regulation:

    We now take the case where the government feels that monopoly price is very high and tries to bring it down by price regulation. To regulate monopoly, the government imposes price ceiling so that monopoly price should be near or equal to competitive price.

    This is done when the government appoints a regulating authority or commission which fixes a price for the monopoly product below the monopoly price, thereby increasing output and lowering the price for the consumer.

    Before the regulation of monopoly price, the monopolist is making PF * OM profits by selling OM output at MP (=OA) price. Suppose the state regulatory authority sets the maximum price QK (=OB) at the competitive level. The new demand curve facing the monopolist becomes BKD. Its corresponding MR curve becomes BKHMR. Now the monopolist behaves like a perfectly competitive producer. He produces and sells OQ output at point К where the MC curve cuts the BKHMR curve from below.

    As a result of price regulation, the monopolist increases his output to OQ from OM. He still makes supernormal profits equal to KG * OQ that are smaller than the monopoly profits (PF * OM) at the unregulated price MP. If the price regulatory authority fixes the monopoly price WS equal to the average cost where the AC curve cuts the D/AR curve at point S, the monopolist would be able to place a greater quan­tity of output OW in the market.

    At this level, the monopolist would earn only normal profits. In such a situation, the monopolist would continue to produce so long as he is getting a fair return on his capital investment. But the regulatory authority cannot force him to increase output beyond OW because the monopolist would not be operating at a loss.

    3. Control of Monopoly through Taxation:

    Taxation is another way of controlling monopoly power. The tax may be levied lump-sum without any regard to the output of the monopolist. Or, it may be proportional to the output, the amount of tax rising with the increase in output.

    Lump-sum Tax:

    By levying a lump-sum tax, the government can reduce or even eliminate monopoly profits without affecting either the price or output of the product. A lump-sum tax imposed on the monopoly firm is shown in suppose where AC and MC are the average cost and marginal cost curves before the tax is levied. The monopolist earns APRT super-normal profits by selling OM product at MP Price.

    The imposition of the lump-sum tax is, in fact, a fixed cost to the monopoly firm because it is independent of output. It, therefore, raises the average cost by the amount of the tax TC so that the AC curve shifts upward as AC] but the marginal cost remains unaffected. So the imposition of a lump-sum tax has the effect of reducing monopoly profit from APRT to APBC.

    The entire burden of the tax will be borne by the monopolist himself. He cannot shift any part of it to his customers at any stage by raising the price and reducing output. Since the monopolist’s marginal cost curve and the marginal revenue curve remain unaffected by the tax imposition, any change in the existing price-output combination would only lead to losses.

    Specific Tax:

    The government can also reduce monopoly profits by levying a specific or a per unit tax on the monopolist’s product. A per unit tax on monopoly output has the effect of shifting both the average and marginal cost curves upward by the amount of the tax.

    Illustrates this case. AC and MC are the monopoly firm’s average cost and marginal cost curves before the tax imposition. It earns BPGK monopoly profits by selling OM quantity of the product at the UP price. Suppose a government levies a specific tax which is a variable cost to the monopoly firm tends to shift the cost curves upward to AC1 and MC1.

    The monopolist’s new equilibrium point is E1 where the MC1 curve cuts the MR curve. The new price is M1P1 >MP (the old price) and the output is OM1

    Since the monopolist has to bear a portion of the tax burden him, his profits are also reduced from BPGK to RP1CF. Such a tax does not help in regulating monopoly price and output. For the higher, the demand elasticity of tax, the higher the price for the product and the lower the output. The ultimate loss will be borne by the public rather than by the monopolist.

  • Valuation of Goodwill: Meaning, Need, Factors, and Methods

    Valuation of Goodwill: Meaning, Need, Factors, and Methods

    Valuation of Goodwill: What is Goodwill? Meaning of Goodwill; Goodwill is the value of the reputation of a firm built over time concerning the expected future profits over and above the normal profits. So, what is the topic we are going to study; Valuation of Goodwill – Meaning, Need, Factors, and Methods (In Hindi). A well-established firm earns a good name in the market, builds trust with the customers, and also has more business connections as compared to a newly set up business. Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing business.

    Here are explained how to Valuation of Goodwill? Meaning, Need, Factors, and Methods.

    Goodwill represents assets that are not separately identifiable. Goodwill does not include identifiable assets that are capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability regardless of whether the entity intends to do so.

    Valuation of Goodwill Meaning:

    There are various circumstances when it may be necessary to value goodwill. Some of the circumstances are;

    First, In the case of a partnership, when there is an admission, retirement, death or amalgamation, or a change in the profit-sharing ratio take place, the valuation of goodwill becomes necessary.

    Secondly, In the case of a company, when two or more companies amalgamate, or one company absorbs another company, or one company wants to acquire controlling interest in another company or when the Government takes over the business, valuation of goodwill becomes necessary.

    Third, In the case of a sole trader concern, goodwill is valued at the time of selling die business, to decide the purchase consideration.

    Finally, In the case of individuals, goodwill is valued for Estate Duty, Death Duty, etc. On the death of a person.

    Need for Valuation of Goodwill:

    Valuation of goodwill may make due to any one of the following reasons:

    A Sole-Proprietorship Firm:

    • If the firm sells to another person.
    • It takes any person as a partner, and.
    • It converts into a company.

    A Partnership Firm:

    • If any new partner takes.
    • Any old partner retires from the firm.
    • There is any change in the profit-sharing ratio among the partners.
    • Any partner dies.
    • Different partnership firms amalgamate.
    • Any firm sale, and.
    • Any firm converts into a company.

    A Company or Firm:

    • If the goodwill has already been written-off in the past but the value of the same is to records further in the books of accounts.
    • An existing company taking with or amalgamated with another existing company.
    • The Stock Exchange Quotation of the value of shares of the company is not available to compute gift tax, wealth tax, etc., and.
    • The shares are valued based on intrinsic values, market value, or fair value methods.

    Factors Affecting the Value of Goodwill:

    The following factors affect the value of goodwill:

    Location:

    A business which locates in the main market or at a place where there is more customer traffic tends to earn more profit and also more goodwill. If the firm centrally locates or locate in a very prominent place, it can attract more customers, increasing turnover. Therefore, the locational factor should always consider while ascertaining the value of goodwill.

    Time:

    The time dimension is another factor that influences the value of goodwill. The comparatively old firm will enjoy a more commercial reputation than the other one since the old one is better known to its customers, although both of them may have the same locational advantages.

    Nature of Business:

    A firm that deals with good quality products or has stable demand for its product can earn more profits and therefore has more value. This is another factor which also influences the value of goodwill which includes:

    • The nature of goods.
    • Risk involved.
    • Monopolistic nature of the business.
    • Benefits of Patents and Trade-marks, and.
    • Easy access to raw materials, etc.

    Capital Required:

    More buyers may interest to purchase a business that requires a comparatively small amount of capital but the rate of earning a profit is high and, consequently, raise the value of goodwill. On the contrary, for a business that required a large amount of capital but the rate of earning a profit is comparatively less, no buyer will interest to have the business and, hence, the goodwill of the said firm pull down.

    Owner’s Reputation:

    An owner, who has a good personal reputation in the market, is honest and trustworthy attracts more customers to the business, and makes more profits and also goodwill.

    Market Situation:

    The organization has a monopoly right or condition in the market or having limited competition, enables it to earn high profits which in turn leads to a higher value of goodwill.

    The trend of Profit:

    The value of goodwill may also be affected due to the fluctuation in the amount of profit (i.e., based on the rate of return). If the trend of profit is always rising, no doubt the value of goodwill will be high, and vice versa.

    The efficiency of Management:

    Efficient management may also help to increase the value of goodwill by increasing profits through properly planned production, distribution, and services. An organization with efficient management has high productivity and cost-efficiency. This gives it increased profits and also high goodwill. Therefore, to ascertain the value of goodwill, it must note that such efficiency in management must not be curtailed.

    Special Advantages:

    A firm that has special advantages like import licenses, patents, trademarks, copyrights, assured supply of electricity at low rates, subsidies for being situated in a special economic zone’s (SEZs), etc. possess a higher value of goodwill.

    Other Factors:

    • The condition of the money market.
    • The possibility of competition.
    • Government policy, and.
    • Peace and security in the country.

    Precaution to Take in Valuing Goodwill: We know that the amount of goodwill always pays for in the future. The buyer will pay a little more than the intrinsic value of assets only when he expects that he will enjoy some extra benefits from such goodwill shortly. On the other hand, if the buyer thinks that there is no possibility of having such advantages in the future, he will not be ready to pay anything for goodwill—even if the value of goodwill is very high.

    Methods of Valuing Goodwill:

    There are two methods of valuing goodwill:

    1. Simple profit method, and.
    2. Super-profit method.

    Simple Profit Method:

    There are two methods based on simple profit:

    • Purchase of Past Profit Method, and.
    • The capitalization of the Average Profit Method.
    A. Purchase of Past Profit Method:

    Under this method, goodwill is expressed as a purchase of a certain number of years’ profit based on the adjusted average profit of a given number of years.

    This method involves two steps:

    • The profits for an agreed number of years preceding the valuation average to ar­rive at the average annual profit earned during that period. This will have to adjust in the light of future possibilities and the average future maintainable profit determined. If the profits have been fluctuating, a simple average use. If profits show a steadily increasing or decreasing trend, appropriate weights are used giving greater weightage for profits of the later year.
    • The average future maintainable profit is multiplied by a certain number of years to find out the value of goodwill. The number of years selected for this purpose base on the expectation of the number of years’ benefit to derive in the future from the past association.

    For example, if the average future maintainable profit is Rs.25, 000 and it expects that this profit would earn for at least another 3 years, then the goodwill will be:

    Goodwill,

    = Rs. 75,000 (25,000 x 3).
    = Average of profit x number of years.

    The number of years over which the profits are averaged and the number of years’ purchase applied may vary considerably in practice but generally falls between one and five years. Estimating future profit beyond a period of say, 5 years would be quite difficult and unrealistic.

    The method suffers from two defects:

    • The difficulty of finding out the right number of years’ purchase of profits as it depends on so many factors and
    • Ignoring capital to employ in the business.
    B. The capitalization of the Average Profit Method:

    The following steps are to take in ascertaining the value of goodwill under this method:

    • Ascertain the average future maintainable profit, as explained already.
    • Capitalize this average profit at the normal rate of return on investment on the type

    Of business under consideration:

    This will give the net worth of the business.

    • Find out the value of net tangible assets (i.e., net assets other than goodwill) of the business.
    • Deduct the net tangible assets from the capitalized net worth of the business and the difference is goodwill.

    Super-Profit Method:

    Strictly speaking, goodwill can attach only to a business that is earning above-normal profits of super-profits. If there is no anticipated excess earning over normal earnings, there can be no goodwill.

    Such excess profits know as super-profits and it is the difference between the average profit earned by the business and the normal profit based on the normal rate of return.

    Hence for find­ing to the super-profits, the following information will require:

    • The estimated average future profits of the firm (ascertained as already explained),
    • The normal rate of return on investment and
    • The fair value of the average capital employed in the business.

    The normal rate of return:

    The normal rate of return refers to the rate of earnings that inves­tor, in general, expect on their investments in a particular type of industry. It varies depending upon general factors like the bank rate, general economic conditions, political stability, etc., and specific factors like period of investment, risk attached to the investment, etc.

    Normal profit and Super-profit:

    If the average capital employed and the normal rates of return know, the normal profit can ascertain. For example, if the average capital employed is Rs. 1, 00,000 and the normal rate of return is 10%, the normal profit is 1, 00, 000 x 10/100 = 10, 000.

    Super-profit is the simple difference between the actual average profit earned and the normal profit. If in the above example, the average profit is Rs. 25,000, then the super-profits will be Rs. 25,000 – Rs. 10,000 = Rs. 15,000

    Goodwill based on Super-Profit:

    There are four methods of calculating goodwill based on the super-profit.

    They are:

    • Purchase of super-profits Method,
    • Sliding-scale Valuation of Super-profit Method,
    • Annuity of Super-Profit Method and
    • The Capitalization of Super-Profit Method.
    1. Purchase of Super-profit Method:

    Goodwill as per this method = Super profit * Number of years. If, for example, the super-profit is Rs. 15,000 and goodwill agree to be 3 years’ purchase of super-profits, then the goodwill will be s.45,000 (15,000 * 3)

    2. Sliding-scale Valuation of super-profits Method:

    This is the only variation of the first method. It is based on the logic that the greater the number of super-profits, the more difficult it would be to maintain. Higher profit will naturally attract competition and soon the firm’s ability to make super-profits is curtailed.

    3. Annuity super-profit Method:

    Under this method, goodwill calculates by finding the present worth of an annuity paying the super profit per year, over the estimated period discounted at the given rate of interest. Usually, the reference to the Annuity Table will give the present value of an annuity for the given number of years and at the given rate of interest.

    Goodwill = super-profit * annuity.

    For example, if the super-profits are Ts. 15,000 and the annuity of re. 1 at 10% for 3 years is 2.48,685, then the goodwill is = Rs. 15,000 * 2.48,685 = Rs. 37,302.75. This method takes into consideration the interest loss involved in paying a lump sum as goodwill in anticipation of the future of profit.

    4. The Capitalization of Super-Profit Method:

    This is similar to the capitalization of the average profit method as already explained. Under this method, the super-profits when capitalized at the normal rate of return will give the value of goodwill.

    Goodwill,

    = Rs. 1, 50, 000 (Rs. 15, 000/10 x 100).
    = Super Profit/Normal rate of return x 100.

    This method gives the maximum value for goodwill. Since the contention that super-profits will continue for long is unreasonable, this method is not safe for one to follow.

  • Top 3 Accounting Methods are very Useful with Docs

    Top 3 Accounting Methods are very Useful with Docs

    What is the Accounting Method? An accounting method is a set of rules under which revenues and expenses are reported in financial statements. The choice of accounting method can result in differing amounts of profit being reported in the short-term. Over the long-term, the choice of accounting method has a reduced impact on profitability. So, what is the topic we are going to discuss; Top 3 Accounting Methods are very Useful with Docs.

    The Concept of Accounting explain; 3 Accounting Methods.

    The primary accounting methods are the accrual basis of accounting and the cash basis of accounting. Under the accrual basis, revenue is recognized when earned, and expenses are recognized when consumed. Accrual basis accounting is required for publicly-held entities, and for any organization that wants to have its financial statements audited. This is considered the most theoretically correct accounting method, but also requires a greater knowledge of accounting, and so is less likely to be used by smaller organizations.

    The other main accounting method is the cash basis of accounting. Under the cash basis, revenue is recognized when cash is received from customers, and expenses are recognized when cash is paid to suppliers. This method is more likely to result in lumpy profitability in any given period since a large cash inflow or outflow can sharply alter profits.

    The following Methods below are;

    (A) Where Separate Set of Books is Kept:

    This method is particularly followed where there are large transactions, that is, the venture is a large one and is continued for a comparatively long period.

    (B) Where No Separate Set of Books is Kept:

    This method is applicable where the joint venture transactions are limited and the ventures reside at two different places. Under this method, each venture will record his own transactions plus the transactions relating to other co-ventures capital whereas the other venture will prepare a Joint Venture Account and the capital of the others, that is, two accounts are prepared in each party’s ledger.

    (C) Where Each Co-Venture Maintains A Record of His Own Transac¬tions (or Partial Record Method) (or Memorandum Joint Venture Method):

    Under this method, each co-venture keeps a record of Joint Venture transactions in which he is involved i.e. each venture records in his own book only the transactions of the joint venture which relate to him. Each party keeps his account in his own books. He will not record the transactions of other co-venture.

    Top 3 Accounting Methods are very Useful with Docs
    Top 3 Accounting Methods are very Useful with Docs. Image credit from #Pixabay.

  • Advantages and Limitations of Forecasting

    Advantages and Limitations of Forecasting

    Explore the advantages and limitations of forecasting to enhance your decision-making. Gain insights into effective strategies for accurate predictions. As we know, What is Forecasting? It may not reduce the complications and uncertainty of the future. Forecasting is the process of making predictions of the future based on past and present data and most commonly by analysis of trends. A commonplace example might be an estimation of some variable of interest at some specified future date. However, it increases the confidence of the management to make important decisions. Forecasting is the basis of promising. Forecasting uses many statistical techniques.

    The Concept of Business is explaining Forecasting for Company, in points of Advantages and Limitations or Disadvantages.

    In this article, we will discuss Forecasting for Business Planning: First Advantages of Forecasting Methods, Advantages of Forecasting, after that Limitations of Forecasting, Basic Disadvantages of Forecasting, and finally discussing Steps in Forecasting. Usage can differ between areas of application: for example, in hydrology the terms “forecast” and “forecasting” are sometimes reserved for estimates of values at certain specific future times, while the term “prediction” is used for more general estimates, such as the number of times floods will occur over a long period.

    Companies apply forecasting methods of production to anticipate potential issues and results for the business in the upcoming months and years. Forecasting methods can include both quantitative data and qualitative observations. Operations management techniques help businesses determine the actions they should take to bring about favorable results and avoid unprofitable scenarios based on those forecasts. These techniques frequently involve the development and distribution of both new and existing products and services.

    #Advantages of Forecasting Methods:

    Businesses employ a diverse array of forecasting methods to evaluate potential results stemming from their decisions. The most notable advantage of quantitative forecasting methods is that the projections rely on the strength of past data. The chief advantage of qualitative methods is that the main source of data derives from the experiences of qualified executives and employees. The vast majority of business owners blend hard data with personal impressions to develop useful forecasts.

    #Advantages of Forecasting:

    Forecasting plays a vital role in the process of modern management. It is an important and necessary aid to planning and planning is the backbone of effective operations.

    Thus the importance or advantages of forecasting are stated below:

    • It enables a company to commit its resources with the greatest assurance to profit over the long term.
    • It facilitates the development of new products, by helping to identify future demand patterns.
    • Forecasting by promoting the participation of the entire organization in this process provides opportunities for teamwork and brings about unity and coordination.
    • The making of forecasts and their review by managers, compel thinking ahead, looking to the future and providing for it.
    • Forecasting is an essential ingredient of planning and supplies vital facts and crucial information.
    • Forecasting provides a way for effective coordination and control. Forecasting requires information about various external and internal factors. The information is collected from various internal sources. Thus, almost all units of the organization are involved in this process, which provides interactive opportunities for better unity and coordination in the planning process. Similarly, forecasting can provide relevant information for exercising control. Also, The managers can know their weakness in the forecasting process and they can take suitable action to overcome these.
    • A systematic attempt to probe the future by inference from known facts helps integrate all management planning so that unified overall plans can be developed into which divisional and departmental plans can mesh.
    • The uncertainty of future events can be identified and overcomes by effective forecasting. Therefore, it will lead to success in the organization.

    #Limitations of Forecasting:

    The following limitations of forecasting are listed below:

    The basis of Forecasting:

    The most serious limitations of forecasting arise out of the basis used for making forecasts. Top executives should always bear in mind that the bases of forecasting are assumptions, approximations, and average conditions.

    Management may become so concerned with the mechanism of the forecasting system that it fails to question its logic. Also, This critical examination is not to discourage attempts at forecasting. But to sound caution about the practice of forecasting and its inherent limitations.

    Reliability of Past Data:

    The forecasting is made on the basis of past data and the current events. Although past events/data are analyzed as a guide to the future, a question is raised as to the accuracy as well as the usefulness of these recorded events.

    Time and Cost Factor:

    Time and cost factor is also an important aspect of forecasting. They suggest the degree to which an organization will go for formal forecasting. Also, The information and data required for forecast may be in highly disorganized form; some may be in qualitative form.

    The collection of information and conversion of qualitative data into quantitative ones involves a lot of time and money. Therefore, managers have to tradeoff between the cost involved in forecasting and resultant benefits. So forecasting should be made by eliminating the above limitations.

    #Disadvantages of Forecasting:

    The primary disadvantage of forecasting is the same as that of any other method of predicting the future: No one can be absolutely sure what the future holds. Any unforeseen factors can render a forecast useless, regardless of the quality of its data. Also, some forecasting methods may use the same data but deliver widely different forecasts. For instance, one forecasting method can show that interest rates will rise, while another will illustrate that rates will hold steady or decline.

    #Steps of Forecasting:

    Procedure, stages or general steps involved in forecasting are given below:

    Analyzing and understanding the problem:

    The manager must first identify the real problem for which the forecast is to be made. Also, This will help the manager to fix the scope of forecasting.

    Developing a sound foundation:

    The management can develop a sound foundation, for the future after considering available information, experience, type of business, and the rate of development.

    Collecting and analyzing data:

    Data collection is time-consuming. Only relevant data must be kept. Many statistical tools can be used to analyze the data.

    Estimating future events:

    The future events are estimated by using trend analysis. Trend analysis makes provision for some errors.

    Comparing results:

    The actual results are compared with the estimated results. If the actual results tally with the estimated results, there is nothing to worry. In case of any major difference between the actuals and the estimates, it is necessary to find out the reasons for poor performance.

    Follow up action:

    The forecasting process can be continuously improved and refined on the basis of past experience. Areas of weaknesses can be improved for the future forecasting. There must be regular feedback on past forecasting.

    Above advantages and limitations, may be explained as you want to understating about Forecasting. Risk and uncertainty are central to forecasting and prediction; it is generally considered the good practice to indicate the degree of uncertainty attaching to forecasts. In any case, the data must be up to date in order for the forecast to be as accurate as possible. In some cases, the data used to predict the variable of interest is itself forecasted.

  • Creative Accounting: Methods, Techniques, and Prevention

    Creative Accounting: Methods, Techniques, and Prevention

    Definitions of Creative Accounting: The term ‘creative accounting’ can define in several ways. Initially, we will offer this definition; “A process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business”. The concept of Creative Accounting study: Methods of Creative Accounting, Techniques of Creative Accounting, and Prevention of Creative Accounting! Also learned, Definition, Motivation, and Ethical Considerations.

    Learn, Explain Creative Accounting: Methods, Techniques, and Prevention!

    They characterize by excessive complications and the use of novel ways of characterizing income, assets, or liabilities. This results in financial reports that are not at all dull; but have all the complications of a novel by James Joyce, hence the appellation “creative”. Sometimes the words “innovative” or “aggressive” use.

    Creative accounting, which generally involves the preparation of financial statements with the intention of misleading readers of those statements, is prima facie a form of lying. Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices but deviate from the spirit of those rules.

    It examines and rejects the arguments for considering creative accounting, despite its deceptive intent, as not being a form of lying. It then examines the ethical issues raised by creative accounting, in the light of the literature on the ethics of lying.

    This literature includes the evaluation of various excuses and justifications for lying and this examines here about creative accounting. It concludes that even in circumstances in which creative accounting would arguably serve a worthy purpose; that purpose would be at least as well served by honest communication.

    Concept:

    Creative accounting also called aggressive accounting, is the manipulation of financial numbers; usually within the letter of the law and accounting standards; but very much against their spirit and certainly not providing the “true and fair” view of a company that accounts suppose to:

    • A typical aim of creative accounting will be to inflate profit figures. Some companies may also reduce reported profits in good years to smooth results. Assets and liabilities may also manipulate, either to remain within limits such as debt covenant or to hide problems.
    • Typical creative accounting tricks include off-balance-sheet financing, over-optimistic revenue recognition, and the use of exaggerated non-recurring items.
    • Window Dressing has a similar meaning when applied to accounts; but is a broader term that can apply to other areas. In the US it is often used to describe the manipulation of investment portfolio performance numbers. In the context of accounts, “window dressing” is more likely than “creative accounting” to imply illegal or fraudulent practices, but it needs to do so.
    • The techniques of creative accounting change over time. As accounting standards change, the techniques that will work change. Many changes in accounting standards are meant to block particular ways of manipulating accounts; which means that intent on creative accounting needs to find new ways of doing things. At the same time, other, well-intentioned, changes in accounting standards open up new opportunities for creative accounting, and in the use of fair value is a good example of this.
    • Many creative accounting techniques change the main numbers shown in the financial statements but make themselves evident elsewhere, most often in the notes to the accounts. The market has been surprised before by bad news hidden in the notes, so a diligent approach can give you an edge.

    Methods of Creative Accounting:

    The following methods below are;

    1] First Methods:

    Although not technically wrong, many annual and quarterly reports and presentations dive heavily into theoretical scenarios where one-time “charges” to earnings are excluded. What this means is, for example, a lawsuit settlement amount would take out of the reported profit in one big chunk, even if its payout little by little over time.

    This practice call reserves. Often, when explaining the quarterly results, a CEO might say; “Well if we didn’t take this charge for the lawsuit, we would have made this much money”. Very often, the hypothetical situations proposed to get even more complicated. The main “creative” aspect to this is when a “one time” “exceptional” charge is very common to the business.

    2] Second Methods:

    Banks can lend out most of the money they receive in the deposit. The banks can also lend money they borrow from other banks. However, to protect against bad loans, banks must keep aside a stash of money called a “reserve”. The bank, within general guidelines, gets to set the size of this reserve to what it feels prudent compare to how risky its outstanding loans are. However, when the bank wants to make it look like it made more money this quarter than last; one way to do that is to make money from the reserve and call it is profit with the excuse that the loans are safer now than before and that amount was no longer needed.

    3] Third Methods:

    One of the main genres of “creative accounting” know as slush fund accounting; whereby some earnings from this quarter hideaway just in case the profit from next quarter is not enough for the management to make their bonuses. This happened most famously at Freddie Mac. As of 2004, there is a large investigation underway to see if retroactive insurance policies from insurers such as General Re of Berkshire Hathaway were used for slush fund accounting. The question is if these insurance policies truly transferred some risk or were merely a slush fund.

    Techniques of Creative Accounting:

    Creative accounting actively applies in six areas. The first area is regulatory flexibility, whereby changes in accounting policy permit by accounting regulation. For example, IAS permit carrying non-current assets can recover at either revalued amount or depreciated historical cost in asset valuation. Secondly, the dearth of regulation by which some accounting treatment might not be fully regulated as there are few mandatory requirements. The third area is management has a large extent of estimation in discretionary areas, such as assumption in bad debts provision. Fourthly, some transactions can time to show the desired appearance in accounts.

    For example, the manager is free to choose the timing to sell the investment just to increase earning in the accounts. Fifthly, to manipulate balance sheet amounts by using artificial transactions. Last but not least, by reclassification and presentation of financial amounts through balance sheet manipulation to smooth financial ratios; and, also based on the cognitive reference point in financial numbers’ presentation.

    Creative Accounting Methods Techniques and Prevention
    Creative Accounting: Methods, Techniques, and Prevention! #Pixabay.

    Prevention of Creative Accounting:

    Those companies most at risk for fraudulent financial reporting tend to be those that have one or more of the following attributes: weak internal control; no audit committee; a family relationship among directors and/or officers; assets and revenue less than $ 100 million; and/or a board of directors dominated by individuals with significant equity ownership; and, little experience serving as directors of other companies.

    To prevent creative accounting, the experts opine that accountants and managers should divide the duties of an internal control checklist. Furthermore, an independent audit committee should always have someone with a strong accounting background; and, audit experience who deals directly with outside auditors. The investors should diversify their investment portfolio to circumvent the problems related to creative accounting by a few unscrupulous companies.

    The company has to adhere strictly to the ethical values it has set itself in the long-run and the short-run of the life of the company. The accounting and accounting practices have to be consistent; and, show to the investors that it is following the ethical practices in all its financial dealing as well as reporting.

    How Enron Played the Game of Creative Accounting:

    According to Mulford, the expert in the field, the most common creative accounting practices include improper revenue recognition and misreporting expenses. However, Enron’s game, explains Mulford, involved special-purpose entities.

    “Enron conducted much of its business in these entities that they controlled. They transacted with themselves. That kind of self-dealing allowed them to report profits when they weren’t traditionally making a profit.”

    Though Mulford wrote the book before and published shortly after Enron’s dealings became public, the authors included a special note in the preface regarding the company’s accounting practices, noting that Enron’s “investors and creditors had not fully discounted the risk associated with the firm’s trading activities, its off-balance sheet liabilities, and its related-party transactions.” The authors add they believe careful attention to steps outlined in The Financial Numbers Game “would have provided an early alert to the possibility of developing problems.”

  • Job Analysis: Meaning, Definition, and Purpose with Methods!

    Job Analysis: Meaning, Definition, and Purpose with Methods!

    Learned, Recruitment & Selection – Job Analysis: Meaning, Definition, and Purpose with Methods! 

    Job Analysis: Meaning, definition, and purpose. Methods of job analysis: job analysis interviews, job analysis questionnaire, task analysis inventory, position analysis questionnaire, subject expert workshops, critical incident technique, F1eisclunann job analysis survey, functional job analysis, job element method, repertory grid, critical incident technique.

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    1. Job Analysis: Meaning.
    2. Job Analysis: Definition.
    3. Purpose of Job Analysis: Broadly speaking in the context of HR selection, job analysis data are frequently used…
    4. Methods of Job analysis:
      1. Job Analysis Interviews: In the Context of HR Selection, a job analysis interview is typically performed for one or more of the following reasons…
      2. Job Analysis Questionnaire.
      3. Task Analysis Inventory: Task inventory process…
      4. Position Analysis Questionnaire: Items on the PAQ are organized into six basic divisions or sections. These divisions and a definition are as follows… with Rating, scales are used in the PAQ for determining the extent to which the items are relevant to the job under study. Six different types of scales are used…
      5. Subject Expert Workshops: There is no one particular format for conducting the workshops. However, the following general steps seem to characterize most workshops…
      6. Critical Incident Technique: As the basic elements of information collected are job behaviors rather than personal traits, it is a work-oriented procedure…
      7. Fleishman Job Analysis Survey.
      8. Functional Job Analysis: Two types of task information are obtained from FJA… with when using FJA, judgments about jobs are based on at least two premises…
      9. Job Element Method.
      10. Repertory Grid: A Grid consists of four parts…
    5. Practical Component.
    6. RECOMMENDED BOOKS.
    7. REFERENCE BOOKS.

    Job Analysis: Meaning, Definition, and Purpose with Methods! all content study and learn in one PDF, PDF Reader online or maybe Free Download: Recruitment & Selection – Job Analysis!

    Job Analysis_ Meaning Definition and Purpose with Methods - ilearnlot

  • Explain the Methods of Job Analysis, with Process!

    Explain the Methods of Job Analysis, with Process!

    Learn and Understand, Explain the Methods of Job Analysis, with Process!

    If you want to study first the Purpose of Job Analysis! So study for better understand. Then learn the Methods of Job Analysis! Now, Though there are several methods of collecting job analysis information yet choosing the one or a combination of more than one method depends upon the needs and requirements of an organization and the objectives of the job analysis process. Typically, all the methods focus on collecting the basic job-related information but when used in combination may bring out the hidden or overlooked information and prove to be great tools for creating a perfect job-candidate fit. Also learn, Meaning and Definition, Explain the Methods of Job Analysis, with Process!

    Selecting an appropriate job analysis method depends on the structure of the organization, hierarchical levels, nature of job and responsibilities and duties involved in it. So, before executing any method, all advantages and disadvantages should be analyzed because the data collected through this process serves a great deal and helps organizations cope with current market trends, organizational changes, high attrition rate and many other day-to-day problems.

    Let’s discuss few of job analysis methods that are commonly used by the organizations to investigate the demands of a specific job.

    Methods of Job Analysis:

    Most Common Methods of Job Analysis

    #Observation Method:

    A job analyst observes an employee and records all his performed and non-performed task, fulfilled and unfulfilled responsibilities and duties, methods, ways and skills used by him or her to perform various duties and his or her mental or emotional ability to handle challenges and risks. However, it seems one of the easiest methods to analyze a specific job but truth is that it is the most difficult one. Why? Let’s Discover.

    It is due to the fact that every person has his own way of observing things. Different people think different and interpret the findings in different ways. Therefore, the process may involve personal biases or likes and dislikes and may not produce genuine results. This error can be avoided by proper training of job analyst or whoever will be conducting the job analysis process.

    #This particular method includes three techniques: Direct observation, Work Methods Analysis, and Critical Incident Technique. The first method includes direct observation and recording of the behavior of an employee in different situations. The second involves the study of time and motion and is specially used for assembly-line or factory workers. The third one is about identifying the work behaviors that result in performance.

    #Interview Method:

    In this method, an employee is interviewed so that he or she comes up with their own working styles, problems faced by them, use of particular skills and techniques while performing their job and insecurities and fears about their careers.

    This method helps interviewer know what exactly an employee thinks about his or her own job and responsibilities involved in it. It involves analysis of job by the employee himself. In order to generate honest and true feedback or collect genuine data, questions asked during the interview should be carefully decided. And to avoid errors, it is always good to interview more than one individual to get a pool of responses. Then it can be generalized and used for the whole group.

    #Questionnaire Method:

    Another commonly used job analysis method is getting the questionnaires filled from employees, their superiors, and managers. However, this method also suffers from personal biasness. A great care should be taken while framing questions for different grades of employees.

    In order to get the true job-related info, management should effectively communicate it to the staff that data collected will be used for their own good. It is very important to ensure them that it won’t be used against them in anyway. If it is not done properly, it will be a sheer wastage of time, money and human resources.

    These are some of the most common methods of job analysis. However, there are several other specialized methods including task inventory, job element method, competency profiling, technical conference, threshold traits analysis system and a combination of these methods. While choosing a method, HR managers need to consider time, cost and human efforts included in conducting the process.

    Process Methods of Job Analysis:

    Job analysis data is collected in several ways with only the specification of the person who is going to carry out the job analysis. Often workers from the HR department participate in job evaluations; also depending on the different methods of job analysis even the managers, bosses, and employees participate. During complicated job analysis, the industrial engineers handle the time and motion studies.

    Another facet of job analysis is the contemplation of the technique used; some techniques of job analysis or methods are observations, interviews, questionnaires and other specific analysis methods. The applications of the techniques used in job analysis mostly depend on the type of organization, its fundamental requirements, and circumstances.

    The various methods of Job Analysis are:

    1. Observation:

    In the job analysis method of observation, the performance of the worker is monitored by a manager, supervisor or job analyst, industrial engineer; the performance is recorded to see whether the tasks and duties are properly done. Job analysis observation may either be continuous or intermittent sampling but the observation is always of limited use since most jobs do not have the capability of doing the observation of the complete job cycles.

    Hence observation is efficient in cyclic jobs and when used combined with other methods. The observation might be used by the supervisor or manager to be familiar with the job and its requirements. During other methods in job analysis, the observation method is immensely useful as it provides vital information about the job.

    2. Work Sampling:

    Work Sampling is a kind of observation; it does not need thorough concentration in all its minute aspects through the whole work cycle. As an alternative; the person doing the job analysis decides the matter and work pace on a specific workday according to the statistical sampling of various actions rather than by constant monitoring and detailed timing of each action. Work Sampling is most effective for regular monotonous jobs and cyclic repetitive jobs.

    3. Employee Diary/Log:

    In this method, the employee himself records his performance in a diary/log along with the frequency of the duty and the time needed to perform. This technique is useful in some ways but becomes tiresome for the employees to record all their duties and the timings. Even some employees believe that the employee diary/log method diverts them from their work and creates unnecessary distractions.

    4. Interviewing:

    In the interview technique of collecting data, the manager or the overseer monitors every job place and the worker performing it. Then a model question or interview form is made to ask the workers and note the answers and to get the proper analysis and complete comprehension of the job and its requirements; one has to talk and interview both the employee and the supervisor.

    This method is exhaustive when the interviewer has to converse with two or more employees in one job. Often the professional and managerial jobs are very difficult and complex to analyze; hence require complex longer interviews. Thus the interviewing method should be combined with any other method for proper assessment.

    5. Questionnaires:

    Questionnaires method is the most popular technique for collecting information in job analysis and a survey device is created and distributed amongst the employees and managers to read and answer. The merits of this method are that bulk information can be collected from the employees without much effort; that also in a short span of time.

    But the problems of job analysis is that it assumes the employee to answer the questions truthfully without any bias but that in reality is quite impossible; as opinions on their work and other things will always be influenced by their personal beliefs. Due to this problem, the job analysis questionnaire is mostly combined with the interviews and observations.

    6. Critical incident method:

    This method consists of observation and documentation of other instances and whether the behaviors were effective or futile to produce the desired results. The critical incident method of behavior includes; the reason of the incident and the circumstance, the work was done by the employee and how it was futile or useful, the assumed outcome of the behavior and also an analysis on the influence the behavior of an employee have on the outcome.

    This method vastly differs from the other job evaluation, methods of conducting job analysis as only here the employee behavior is not recorded when it is performed but later when the behavior has been evaluated to be futile or useful depending on the results.

    Here the behavior is described in retrospect and it is acknowledged that recording of past actions is more difficult and complicated than of present actions when the performance is continued.

    Explain the Methods of Job Analysis with Process - ilearnlot

  • What is the Inductive Method of Economics?

    What is the Inductive Method of Economics?

    The Inductive Method: Induction “is the process of reasoning from a part to the whole, from particulars to generals or from the individual to the universal.” This article explains the Inductive Method of Economics; Bacon described it as “an ascending process” in which facts are collected, arranged and then general conclusions are drawn. Also learn the Methods of Economics.

    Here are explaining and learn, What is the Inductive Method of Economics? Steps, Merits, and Demerits.

    The inductive method was employed in economics by the German Historical School which sought to develop economics wholly from historical research. The historical or inductive method expects the economist to be primarily an economic historian who should first collect material, draw generalizations, and verify the conclusions by applying them to subsequent events. For this, it uses statistical methods. Engel’s Law of Family Expenditure and the Malthusian Theory of Population have been derived from inductive reasoning.

    The inductive method involves the following steps:
    The Problem:

    In order to arrive at a generalization concerning an economic phenomenon, the problem should properly select and clearly stated.

    Data:

    The second step is the collection, enumeration, classification, and analysis of data by using appropriate statistical techniques.

    Observation:

    Data are using to make the observation about particular facts concerning the problem.

    Generalization:

    On the basis of observation, generalization is logically deriving which establishes a general truth from particular facts.

    Thus induction is the process in which we arrive at a generalization on the basis of particular observing facts. Also learn, Explain is What is Economics? Meaning and Definition of Criticisms!

    The best example of inductive reasoning in economics is the formulation of the generalization of diminishing returns. When a Scottish farmer found that in the cultivation of his field an increase in the amount of labor and capital spent on it was bringing in less than proportionate returns year after year, an economist observing such instances in the case of a number of other farms, and then he is arriving at the generalization that is known as the Law of Diminishing Returns.

    Merits of the Inductive Method:

    The chief merits of this method are as follows:

    Realistic:

    The inductive method is realistic because it is based on facts and explains to them as they actually are. It is concrete and synthetic because it deals with the subject as a whole and does not divide it into component parts artificially

    Future Inquiries:

    Induction helps in future inquiries. By discovering and providing general principles, induction helps future investigations. Once a generalization is establishing, it becomes the starting point of future inquiries.

    Statistical Method:

    The inductive method makes use of the statistical method. This has made significant improvements in the application of induction for analyzing economic problems of the wide range. In particular, the collection of data by governmental and private agencies or macro variables, like national income, general prices, consumption, saving, total employment, etc., has increased the value of this method and helping governments to formulate economic policies pertaining to the removal of poverty, inequalities, underdevelopment, etc.

    Dynamic:

    The inductive method is dynamic. In this, changing economic phenomena can analyze on the basis of experiences, conclusions can draw, and appropriate remedial measures can take. Thus, induction suggests new problems to pure theory for their solution from time to time.

    Historico-Relative:

    A generalization drawn under the inductive method is often historical-relative in economics. Since it is drawn from a particular historical situation, it cannot apply to all situations unless they are exactly similar. For instance, India and America differ in their factor endowments. Therefore, it would be wrong to apply the industrial policy which was following in America in the late nineteenth century to present-day India. Thus, the inductive method has the merit of applying generalizations only to related situations or phenomena.

    Demerits of Inductive Method:

    However, the inductive method is not without its weaknesses which are discussing below.

    Misinterpretation of Data:

    Induction relies on statistical numbers for analysis that “can misuse and misinterpret when the assumptions which are requiring for their use are forgotten”.

    Uncertain Conclusions:

    Boulding points out that “statistical information can only give us propositions whose truth is more or less probable it can never give us certainty”.

    Lacks Concreteness:

    Definitions, sources, and methods using in statistical analysis differ from investigator to investigator even for the same problem, as for instance in the case of national income accounts. Thus, statistical techniques lack concreteness.

    Costly Method:

    The inductive method is not only time-consuming but also costly. It involves detailed and painstaking processes of collection, classification, analyses, and interpretation of data on the part of trained and expert investigators and analysts

    Difficult to Prove Hypothesis:

    Again the use of statistics in induction cannot prove a hypothesis. It can only show that the hypothesis is not inconsistent with the known facts. In reality, the collection of data is not illuminating unless it is related to a hypothesis.

    Controlled Experimentation not Possible in Economics:

    Besides the statistical method, the other method used in induction is controlled experimentation. This method is extremely useful in natural and physical sciences which deal with the matter. But unlike the natural sciences, there is little scope for experimentation in economics because economics deals with human behavior which differs from person to person and from place to place. Also, What is Demand? Meaning and Definition.

    Further, economic phenomena are very complex as they relate to the man who does not act rationally. Some of his actions are also bound by the legal and social institutions of the society in which he lives. Thus, the scope of controlled experiments in inductive economics is very little. As pointed Out by Friendman, “The absence of controlled experiments in economics renders the weeding out of unsuccessful hypo-these slow and difficult.”

    What is the Inductive Method of Economics - ilearnlot
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