Bank Reconciliation Statements

To reconcile is to make two parties agree. In Bank reconciliation, the two parties are the Bank and the Customer of the Bank. The agreement here is that the Customers Bank Statement as provided by the bank and the Customer's own Cash book must agree in terms of closing balance on each account.

The Cash Book

In simple terms, this is an account that records all transactions of an individual or business involving the inflow or outflow of cash either physically or cash kept at the bank.

The Bank Statement

A statement prepared by a bank for a customer indicating amounts deposited and withdrawn from the customer's account within a period of time

Both accounts are related and the double entry for a transaction in one account must reflect in the other account. Whenever a customer receives money through his bank account, His Cash Book is debited with the amount and the Bank Statement is credited to the tune of that amount. The opposite happens when money moves out of the Bank Account of a customer- the cash book is credited and the Bank account credited. If there are no discrepancies upon comparing both accounts then there will be no need to reconcile the accounts. But in most cases, both accounts will have different balances normally due to some errors from either side of the party.

Whenever cash moves in and out of a customer's bank account, records are made by that customer and at that same time the bank will also be recording the flows of cash into and out of the business bank account. Banks usually send a copy of that record, called a bank statement, to their customers on a regular basis, but a bank statement can be requested by a customer of the bank at any time.

What causes the Balances to Differ?


Let us carefully examine the sample Cashbook and Bank Statement above to understand our topic.

We can see that there are some items in the cash book that do not appear in the Bank Statement and other items in the Bank Statement that do not also appear in the Cash Book.

Items Not appearing in cash book

• Bank Charges - GH¢50
• James Korlet-Direct Credit-GH¢150

Items Not Appearing in the Bank Statement

• Frank Lim-GH¢250

Obviously, our closing balances are not the same as well.

The items listed above are some of the reasons why our balances do not agree on both the cash book and the bank statement.

Let's try to identify why these items could not be found in the other account, could it be an oversight? Or there's more explanation to that? We'll see about that soon.

So on the first item "Bank Charges" This could not be found in our cash book although our bank has charged it against our account. These charges are usually done at the end of the period and the customer does not usually know how much is being charged by the bank for all services rendered. In some cases, you might even think some services rendered by the bank are for free until you see it being charged against your account. When the bank charges us, it may not send an invoice, it simply takes the money from our account. In cases like this, our cash book will tell a different story from the bank statement.

The second item being a Direct Credit is also not in our cash book. This kind of transaction occurs when our debtors or anyone at all directly sends money into our account without informing us. In this case, we will not know of such transactions but our bank who knows of it credits the amount in our bank statement.

The third item bearing the name of a person "Frank Lim" does not appear in the Bank Statement. It could be that the bank forgot to add that particular transaction or we recorded it wrongly in our cash book. In most cases, what happens is that we give out a cheque and then its rejected by the bank, When this occurs and the person to whom the cheque was given does not inform us, we assume that we've paid that person and as such appears at the credit side of our cash book. But because the Bank rejected the cheque, it does not make any entries into the Bank Statement.

Moving away from the examples in the image, there are some other instances that will make our balances differ.

Unpresented Cheques: A cheque can be given to a customer but then this customer does not go to cash the cheque. Maybe he does that after the period our bank Statement is given to us. In this case, the amount on the cheque will appear on the Cr. Side of our cash book but will be found nowhere in the bank statement.

Bank Interests: This also causes a similar effect to that of bank charges, the amount of interest paid may not be known by the customer and even the bank might not give any document to the customer immediately such interest has been paid. In some cases too, the customer may know of the interest to be paid but not the exact amount. So if the customer fixes an estimated value in his cash book, it will probably be different from what is in the Bank Statement.

Standing Orders: These are instructions from the customer to the bank to undertake certain transactions on behalf of the customer, the customer does not know when these transactions will actually be performed by the bank and as such may not record a transaction which the bank has performed or the customer may record a transaction which has not yet been performed by the bank and not in the Bank statement.

Direct Debit: This is the exact opposite, with direct credit, money is moving into your account without your knowledge but with direct debit, money moves out of your account and could be that you're unaware of the actual amount until it has been shown in the Bank Statement. The difference between this and standing order is that a direct debit is a permission given by the customer to his creditors to obtain money directly from his(customer) account whereas a Standing order is an instruction by the customer. IN the case of direct debits, the bank will have to charge whatever amount the customer's client need to charge from the customer's account. But the customer must inform the bank of the amount he wants the bank to charge to his account in the case of standing order

Dishonored Cheques: A cheque dishonored is a Cheque drawn by a customer for which the Bank refuses payment for some reasons. When this happens, the customer might have left his cash book with that amount of the cheque dishonored whiles the Bank Statement will show no such records because the cheque was rejected. Some of the reasons for rejecting a cheque include;

1. Insufficient funds
2. Insufficient mandate
3. Amount in words is different from amount in figures
4. No signature of account holder
5. Signature difference from bank specimen
6. Postdated Cheque
7. Stale Cheque

Errors: We cannot do away with errors as humans and as such there could be some errors coming from the side of the bank or errors made by the customers. Both parties must work together to be able to sort out such errors when identified. It could be that some figures have been overstated, understated, left out of the accounts or on the wrong side of the account.

How to Reconcile

We'll have to examine both accounts and identify the errors in each and correct them with information available.

Correcting the Cash Book

By comparing our Cashbook to the bank statement, we would have realized some errors or omissions from our side, these need to corrected by opening an "Adjusted Cash Book". This account will contain balances from the initial Cash Book as well as adjusted entries to correct errors or record omissions from the initial Cash Book. Thus, you debit whatever was supposed to be debited and credited what was to be credited but was left out in the original cash book.

Some Errors or Omission in the Cash Book may arise from;

1. Payments made directly into our bank accounts without our notice and not entered in the Cash Book
2. Dividend received (e.g. from Investment) paid directly into the bank accounts but not in the Cash Book
3. Bank Interest(e.g. from savings account) & Bank Charges(e.g. from ATM Charges) not entered in the cash book
4. Other errors such as overcast & undercast

Other Errors or Omissions may also be found in the Bank Statement, these include;

1. Cheques drawn by customers but has not yet been presented to the customer's bank for payment. In this case, the amount will appear in the Cas Book only since the bank is unaware of such transactions until it has been presented for payment. These are known as Unpresented Cheques
2. Also customers may receive cheques from other people for which the Bank is yet to show the effect of it in the customer's account. In tha case, such amounts will only appear to be in the Cash Book only and not in the Bank Statement since it is yet to be cleared and entered in the account by the Bank,=. These are known as "Uncredited Cheques".

Just as we did initially, you'll have to compare both statements. Identify which figures appear in both, which ones do not appear in either and that's where the work begins. For examination purposes you might be told what circumstances led to the differences in the balances, in that case, your work becomes a but simpler, Let us take a look at such instance from this illustration.

The cash book of Lexis Limited as at 31 December 2016 discloses a balance of GH¢18,450 which did not agree with the bank statement balance. Investigation revealed the following:

• Cheques received of GH¢52,000, GH¢5,000 and GH¢12,450 were still in the business drawer.
• GH¢1,200 and GH¢1,800 standing orders for the payment of Electricity charges and Insurance respectively were paid by the bank but this has not been recorded in the cash book of Lexis Limited.
• The bank charged GH¢150 for a cheque book issued to Lexis Ltd.
• The bank has wrongly debited a cheque of GH¢4,955 into Lexis Ltd account which should have been placed in another customers account.
• A credit transfer of GH¢5,000 had been made in favour of Lexis Ltd. The transfer has not been recorded in the cash book.
• A cheque of GH¢70,000 drawn by Lexis limited was correctly entered in the cash book but debited to the bank statement as GH¢7,000
• The following cheques which were paid in November 2016 had not been presented

Cheque Number	GHS
00001168	5,000
00001190	4,655
00001142	2,000

Required: Prepare the;

1. The adjusted cash book
2. A statement to reconcile the balance in (i) above to the bank statement balance

Solution





In the preparation of the Bank Reconciliation Statement, we needed to correct errors that affected the Bank Statement as well as including our Adjusted Cash Book Balance. Errors that affect the Bank Statement either increase or decrease our Balances, so we sum up all errors or omission from the Bank Statement that makes our account appear to have a higher Balance (NB: Balance from the Bank Statement and not Cash Book) and then we add it to the Adjusted Cash book Balance.

We then subtract the summation of items that makes our balance in the Bank Statement appear to be less.

Normally, items that make our Balances in the Bank Statement appear to be higher are;

• Unpresented Cheques- Because the customers have not yet presented them to the bank and as such the bank has not made any deductions.
• Wrong Credit: An error that makes the credit side of the Bank Statement higher than what it is supposed to be.

Items that make the balances in the Bank Statement to be lower include;

• Uncredited Cheque- Because the bank has not recorded that these cheques have been deposited into our accounts.
• Wrong Debit- Errors that make the debit side of the Bank Statement higher than what it is supposed to be.

The Accounting Equation and some Cool Terms😎

Income, Revenue, and Gains?

Are these related at all? Do they all mean the same thing? I am sure we have probably used them interchangeably before, maybe it’s acceptable in other disciplines but not accurate when you use them in an accounting environment. Let us try to understand them each;

Revenue

The amount earned from a company's main activities such as selling merchandise or providing services. For example, a company that sells cars gets its revenue from the amount paid by customers when a car is bought. Revenue normally comes from goods purchased. Remember we say purchases usually refer to goods bought for resale. So as far as the asset is meant for resale not use, it is a revenue

Gain

A peripheral activity, such as selling the old delivery car. A Gain is the amount received that is in excess of the asset's carrying amount (book value). A company that sells cars decides to sell one of the cars used by the company itself, let say the Managing Director’s car, this is a Gain because the company does not deal in this kind of sale. The Managing Director’s car was bought with the intention of use by the company and not resale.

Income

Sometimes used instead of the word revenue: some people refer to the rent they receive as rent income. Generally, accountants use the word income to mean "net of revenues and expenses." For example, a retailer's income from operations is sales minus the cost of goods sold minus operating expenses. With the story of our car selling company, their income will be the revenue we talked about minus operating expenses incurred by the company

What the Operating Expenses?

Are they different from normal expense?
They are the cost of a company's main business activities that have been used up during the period.

The Accounting Equation

This is the basis upon which the double entry system is constructed. The equation expressly states that:

Assets = Liabilities + Shareholders' Equity

Assets

An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to floe- IASB’s. Moving away from this definition, assets are simply resources that bring some form of future economic benefits to the businesses that own them. Examples of assets are Factory, Office Building, Warehouse, Office furniture, etc
There are two classifications of Assets;

Non-Current Assets

these are assets from which future economic benefits are expected to flow in more than a year after the reporting year. They have no intention of resale for Non-Current Assets and they earn profit or income from its usage

Current Assets

These are assets from which future economic benefits are expected to flow in not more than a year after the reporting year. There is an intention to turn such assets into cash within one accounting year.

Liabilities

These are obligations of businesses to transfer assets or provide services to other entities as a result of past transactions or events. IASB’s conceptual framework defines liability as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Examples of Liabilities are amounts owed to a supplier of goods bought on credit and bank overdraft.

Capital or Equity

These are amounts invested in a business by the owner and amounts are the business owes to the owner. This is also a liability, a special kind of liability known as Capital. It is usually in the form of shares for limited liability companies.
According to the IASB, Equity is the residual interest in assets of the business after deducting all its liabilities.

Balance Of Payments

A country's balance of payments (BOP) accounts is a systematic statement of all economic transactions between that country and the rest of the world It involves transactions of goods and services and movements of assets.
These transactions are either a debit or a credit entry in the accounts of the country.

• Transactions that the earns a country foreign currency is entered as a credit(loans Inclusive)
• Transactions that involve spending foreign currency are entered as debits

Such Transactions associated with BOP includes those on

• Goods
• Services
• Assets

The Balance of Payment Account is normally divided into two parts;

1. The Current Account
2. The Financial Account(Also known as the Capital Account)

The Current Account

The Current Account of records all visible (merchandise) trade/goods, invisible trade (services) as well as unilateral transfer payments. Thus BOP on current account refers to Merchandise balance, Services balance, and Unilateral Transfer balance. Is is "one-way" meaning: the country giving such transfers do not receive anything back from the other party. It involves gifts to governments and foreign aid.

The current account records transactions for goods and services, interest and transfers.
From this, we know that the current account can be subdivided into the;
Visible and Invisible account;
The Visible Account records transactions in physical goods such as;
Cocoa, Gold, Oil, and Timber

The Invisible Part of the Account will comprise of;

• Transactions from the imports and exports of services
• Payments of Investment Income(NB: Not investment itself but the income from investment)
• Unilateral Transfers

The balance of Trade and Balance on the Current Account

The balance of trade is the difference between exports of goods and services and imports of goods and services. 

The Balance of trade is the largest component of a country's balance of payments.

The Balance on Current Account consists of net exports of goods, plus net exports of services, plus net investment income, plus net transfer payments. 

It shows the difference between how much a nation has spent and how much it has earned.

The Capital/Financial 

The Capital Account records all international transactions that involve a resident of the country concerned changing either his assets with or his liabilities to a resident of another country. The Capital Account takes care of transactions that either increase or decrease a country's assets or liabilities.

The Capital Account involves transactions such as;

• Unilateral transfer of Assets 
• Debt Forgiveness 
• Remittances from international migrants

Whiles the Financial Account includes the following;

* Sale of county's asset; E.g. GT Bank sold to Vodafone

* Direct Portfolio Investments(NB: the return on this investment will be under CA)

* Purchases of Sovereign Bonds

Official Settlement Balance

This balance refers to the net change in a country's reserve asset held by a country.

Official reserves assets include gold, foreign currencies, Special Drawing Rights(SDRs) and reserve positions in the IMF.

Includes activities in relation to financial transactions involving 

• The Central Bank of a country and the IMF
• The Reserve Assets

When a country runs a BOP surplus, its net holdings of reserve assets will increase.

The balance of Payment Disequilibrium

Balance of Payments disequilibrium occurs when payments on a country’s imports exceed the receipts from its exports or when the receipts from a country’s exports exceed the payments from its exports.

That means a disequilibrium can only occur in the current accounts. When such disequilibrium occurs, it is financed from the Capital Account to ensure equilibrium. For this reason, we say The BOP always Balances!!!

Deficit versus Surplus Balance of Payment

A deficit balance of payments occurs when payments on a country’s imports exceed the receipts from its exports

Balance of Payments is said to be a surplus when the receipts from a country’s exports exceed the payments from its exports.

Balance of Payment Transactions

Transactions are either debit or credit transactions

All transactions that bring receipts from foreigners are credit transactions

• Merchandise exports 
• Transportation and travel receipts
• Income received from investments abroad
• Gifts received from foreign residents
• Aid received from foreign governments

Transactions that involve payments to foreigners are debit transactions 

• Merchandise imports
• Transportation and travel expenditures
• Income paid on investments of foreigners
• Gifts to foreign residents
• Aid given by home government
• Overseas investments by home country residents

Every credit transaction has a balancing debit transaction, and vice versa, so the overall balance of payments is always in balance.

A statistical discrepancy is computed where the bop is not in balance to make up for any shortfalls.

Discrepancies proceed from:

• Under-reporting investment incomes
• Under-reporting merchandise imports
• Under-reporting capital exports

People hide these transactions from governments for the purposes of tax avoidance or some other reason.

Financing The Balance of Payment Deficit

There are short-term measures to  correct balance of payments deficit:

Borrowing from Domestic sources:

1. Government borrowing domestically from the central bank
2. Government borrowing domestically from the public e.g. sale of bonds

Borrowing from External Sources:

1. Borrowing from trading partners.
2. Borrowing from international organizations such as the IMF and the World Bank.
3. Borrowing from international capital markets e.g. Euro Bonds

You're being Watched

Is Privacy no longer a term for the internet?

What Happens with just One Click?

1. You visit websites and tracking files record your online activity
2. Tracking companies use these records to build your profile based on your internet search
3. These tracking companies sell your information to advertisers
4. Your data is also available on exchange networks where anyone can purchase your profile.
5. Your personal profile can also be linked to other sources of your personal data
6. Once again, this is sold to advertisers looking for consumers with your interests
7. Advertisers buy ad space from websites at auctions
8. Real-time automated bidding starts as you surf the web

How you are Tracked

Cookies

A small piece of data is sent from a website and stored in a users web browser.

Types of Cookies

• Absolutely Necessary Cookies: Required for a website to work
• Functional Cookies: Social sharing and behavioral
• Targeting Cookies: Full user tracking

Pixel Trackers

Small 1*1 images are placed on specific pages so site owners know when the specific page is loaded

Deep Packet Inspection

Enables advanced network management, user service, and security functions as well, along with internet data mining, eavesdropping, and internet censorship

Supercookie

It can create user profile even after regular cookies have been deleted

Device Fingerprinting

The Cookie(less) Monster
Information is collected from properties without depending on cookies from all your devices like PC, Smartphones and Tablets to identify and track even if "Do Not Track" is enabled.

How?

1. When a device is turned on, these characteristics in the browser make it unique
2. Screen Dimension
3. Browser version
4. List of Plugins(Flash, Java, etc)
5. List of Installed Apps
6. Clock
7. What the browser talks to

Is it Legal?
Unfortunately, Yes!!!
This category falls under supercookies, meaning they are outside the traditional restrictions on tracking cookies.

5 Steps to Maintain your Privacy.

1. Install a browser plugin like Collusion to check how many companies are tracking you every day.
2. Use a Virtual Private Network to add another layer to your internet usage. My personal favorite is Tor Brower which comes with a built-in VPN and other security features to prevent you from being Tracked.
3. Disable Javascript and Flash and change your computer settings frequently.
4. Install Plugins like Ghostery, Disconnect or Peer Block to block trackers.
5. Turn off cookies and stick to regular font stack.

Sources:
http://online.wsj.com
http://phys.com
http://webmonkey.com
http://arstechnica.com
http://wikipedia.com
http://w3techs.com
https://techgenie.org/

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Recording Transactions

Whenever an accountant says he's recording a transaction, It's really nothing technical. Recording a transaction simply means taking accounts of an activity which involves the exchange of goods or services and even the exchange of money. When such business activities occur, the accountant should know which accounts are involved and how each accountant is affected; a business transaction will either increase or decrease a particular account. To record such activities into the books of the company, the accountant will need some documents to show as proof or reference to back these transactions. In this post, we'll go through some documents that accounts can rely on to record business transactions.

Source documents

They are forms of evidence to prove that some transactions took place for which there is a need to record into the books of accounts
Here are some source documents for recording transactions;

1. Invoice
2. Receipts
3. Credit Note
4. Debit Note
5. Purchase Order
6. Sales Order
7. Quotation

>

Invoice Vs. Receipt

One major difference between the two is that a receipt is issued after payments have been made. The invoice is just a statement of goods sent or services provided, together with the costs or sum of monetary value for these goods and services. The invoice relates to a sales order or purchases order. On the contrary, receipt acts as documentation for the buyer that the amount of the goods has been paid. 

Receipt relates to cash sales. In short, a receipt is proof of payment whereas invoice is a list of goods and services and their prices to be sent to the company requiring those goods or services.
Invoices are usually issued when there is a credit sale, the invoice tells the debtor how much he owes the credit, the debtor will then pay according to the amount on the invoice issued to him. After this payment, after this payment, the "debtor" will no longer be liable and will now be given a receipt.

There will be no need for an invoice for cash sales.
More on Invoice: Most invoices are numbered so that companies can keep track of all invoices sent and also to accountant for their debtors.

Debit Note Vs. Credit Note

Both documents are used when the return of goods are being made. When a business issues a debit note, it means it is returning goods outwards and as such the debit note being issued indicates the other business is receiving; Like in the basic accounting class where we are told to” debit the receiver and credit the giver”. With this said, receiving company will also give out a credit note to the company returning the goods. The issue of the credit note indicates that the other company(returning) the goods is the “giver”

Quotation

This is a document sent to a customer stating the fixed price that would be charged to produce or deliver goods or services. Quotations are normally used when there are no fixed or standard prices to produce or deliver goods or services. Thus when the skills, materials and time required vary according to the customer's needs. This document is very similar to an invoice, but in this case, the buyer has not yet received any goods or services from the seller. In fact they seller may even decide not to buy from the buyer after receiving the quotation.

Sales Order Vs Purchase Order

The Purchase Order is a document with details of goods and service that a company wishes to purchase from another company, whereas Sales Order is a document with details of an order that has been placed by a customer.

A Journal

A journal is a more detailed record of financial transactions in order by date. It is detailed in the sense that it includes an explanation of each transaction. The records in journals do not end there but are later posted to other accounting books such as a ledger. It is often referred to as the Book of Original Entry 

Types of Journal

1. Purchase journal
2. Sales journal
3. Cash Book
4. Purchase return journal
5. Sales return journal
6. Journal proper/General journal

You should note that the cash book falls under the category of both journals as well as a ledger.

We will now discuss each Journal a bit in details:

Purchases Journal: It is used to record the credit purchases of goods for resale. Note the keywords credit and resale. Purchase of assets and other things on credit should not be recorded in purchase journal rather, record these in general journal. Posting in the Purchases Journal does not follow the double entry principle so, at the time of recording them, its  dual aspect has to be completed

Sales Journal: It is used to record credit sale of goods only.  Cash sale of goods is recorded in cash book. A credit sale of an asset is recorded in general journal.

General Journal: It is used to record any other transaction that does not fall into any category of journals listed above. 
The following are some uses of the General Journal:

1. To record rare transactions, eg. Sale of Non-Current Asset, Writing off bad debts
2. Correction of errors
3. Adjusting entries
4. Opening Entries - When a businessman wants to open the book for a new year, it is necessary to journalize the various assets and liabilities before the new accounts are opened
5. Closing Entries - When the books are balanced at the close of the accounting period with a view to preparing final accounts it is necessary that balance of all the income and expenses accounts must be transferred to trading and profit and loss account.
6. To record transactions that cannot fit into any other journal
• Distribution of goods as a free sample
• Distribution of goods as charity
• Goods stolen by employees.
• Exchange of one asset for another asset
• Goods destroyed by fire.

Importance of keeping Journal Accounts

1. Each transaction is recorded as soon as it takes place. So the possibility of any transaction being omitted from the books of account is minimized.
2. The Ledger is kept tidy and brief because the transactions are kept and recorded in journal chronologically with narration, it can be easily ascertained when and why a transaction has taken place.
3. Any mistake in the ledger can be easily detected with the help of journal.
4. Journals show the complete details of every transaction

What you Should Note when making Journal Entries

1. Date on which the  transaction occurred
2. The account to be debited and the corresponding monetary value 
3. The account to be credited and the corresponding monetary value 
4. A reference(Source Document) to the source document that initiated such entry. Example invoice or credit note
5. A reference of the ledger in which entry is posted. Usually, a separate column is maintained with the name “folio”
6. A short narration of transaction that tells you what transaction was about.

We have already seen the first step in the process if recording transactions, Now we have to look at methods to summarize them: Using Ledgers and Double entry

A ledger

A ledger is simply a book for recording business transactions measured in terms of money. Transactions in the ledger are summarized and act as a central repository of information for the accountant. Most people refer to the ledger as the general ledger.

Types of Ledgers:

1. Subsidiary Ledger: this consists of the;
• Sales ledger- for the personal accounts of customers
• Purchases Ledger-  for the personal accounts of suppliers
2. Main(General) Ledger: The main ledger takes account of all other transactions

Trade Discounts Vs Cash Discounts

Trade Discount is a deduction from the retail price and normally arises from bulk sales. Whereas Cash discount refers to the value deducted from the total amount that was supposed to have been paid by the purchaser. Cash discount is a deduction from the invoice price and it serves as a motivation for the purchaser to pay the amount due within a specified time  Trade discount is not recorded in the books of account because it does not bring any financial change of seller or buyer.
Records of Trade Discounts are only made on the invoice.
Let's make these definitions a bit basic for ourselves; Let's say you bought goods worth USD100,000.00 but then the seller has made arrangements for you to pay only USD98,000.00 out of the initial price; the rest of the USD2,000.00 is for you to keep; in such a case like this, the buyer has received a Cash Discount.(A discount on the actual amount he was supposed to pay.
Here is another case, a buyer walks to a shop and it's displayed on the prices of the products that there's a discount of say 20%. In this case, the cost of the product is now 80% of the original cost. This is the decision from the seller and not in consultation with the buyer and does not affect the payment of the total amount due. This is a Trade Discount
Also both documents serve different purposes; A trade discount is usually meant  to encourage buyers to make bulk purchases, whereas Cash Discounts; to speed up payment by the buyer. 

Types of Accounts

An account is a record or a summary of similar or particular transactions or events.

Unemployment

Who are the Unemployed?

The unemployed refers to those who are not employed but are actively looking for work. Thus, those who have made specific efforts to find work in a specified period

The Unemployment rate

The unemployment rate is the fraction of the labor force that is unemployed. That is the unemployed population divided by the sum of the employed and the unemployed. The unemployment rate does not matter whether you are fully employed or underemployed, all will be counted as being employed. Thus, even if you worked one hour in a particular month, you'll still be counted.

Discourage Worker

They are people without employment who have given up the search for employment. They are not part of the labor force and therefore are not counted as unemployed.

Job Acceptance

This refers to workers who are prepared to accept work at the going wage rate

Unemployment Spell & Unemployment Duration

The number of times that an unemployed person remains continuously unemployed is called an unemployment spell. For example an individual who starts the year with a job but loses it around March, finds a new one in June (Spell 1, duration 3mths) and holds on to it until October when he loses that job for and remains unemployed until the end of the year (Spell2, duration 2 months) will have had two spells of unemployment during the year.

The length of time an unemployment spell lasts is called the duration of that spell.

TYPES OF UNEMPLOYMENT

There are three main types;

Structural Unemployment

This occurs when the structure of the economy changes. Jobs may move from certain sectors to others. E.g. Improved tech has made typewriters and producers of typewriters no longer exists. Here we say there is a mismatch of skills available & demand for the work.

Frictional Unemployment

This refers to the time taken to find a job. It includes fresh School Graduates who are waiting for job postings and people already working who have quit to work elsewhere. It can never be zero.

Cyclical Unemployment

Associated with the business cycle. (the ups & downs in the economy). When the economy goes down(in a recession), people will be fired because demand for goods and services is low and production has to be lowered to reduce wastage. It affects all sectors.

The Natural Rate of Unemployment

The natural rate of unemployment is a combination of frictional, structural, and surplus unemployment. Even a healthy economy will have this level of unemployment because workers are always coming and going, looking for better jobs. This jobless status, until they find that new job, is the natural rate of unemployment. It is the rate of unemployment when the labor market is in equilibrium.

The following factors affect the natural rate of unemployment;

1. Mobility of Labour
2. Skills & education
3. Availability of job information

Cost of Unemployment

The cost of unemployment can be categorized into Economic Costs and Social Costs.

The main economic cost of unemployment is the loss of output. It is very obvious that when many people are not working, the total output will be lesser than what would have been achieved if everyone was working.
We can further support our claim to loss of output with Okun's Law

Okun's Law

According to Okun's law for every 2% fall in GDP relative to the potential (or full employment GDP) the unemployment rate rises by about 1 percentage point. That is if unemployment increase by 1%, GDP will decrease by 2%.

Other Economic costs of Unemployment include:

1. Loss of skill
2. Reduction in government revenue

Social Costs of Unemployment

1. Psychological impacts due to unemployment
2. Increase in Social vices & crime
3. Poor mental Health of individuals

The Philip's Curve

The curve shows the relationship between unemployment and inflation.

The Short Run Philip's Curve

The Short-run Philip's Curve is downward sloping. This is because; attempts to Decrease Inflation increases the rate of Unemployment whereas attempts to Decrease Unemployment Increases Inflation.

Why?
Case 1: Reduced Unemployment; Increased Inflation

• When we want to reduce unemployment, Government will have to pump more money into the economy.
• This increase AD
• As such, the equilibrium output must increase to catch up with the increased AD.
• Output can only increase by employing more people to work.
• This reduces unemployment
• Inflation will rise (demand Pull) as a result of more money chasing relatively fewer goods.

Case 2: Reduced Inflation; Increased Unemployment

• When Government wants to reduce inflation, it will have to reduce the money supply
• Reduced money supply means AD will reduce
• When this happens, equilibrium output must fall
• Output falling means fewer people will be required to worked and more will be laid off

The Long Run Philip's Curve

In the long run, there is no negative or no relationship at all between inflation & unemployment. It is determined by the Natural rate of Unemployment which is the nonaccelerating rate of unemployment or unemployment at Full employment.

Who Qualifies as Employed or Unemployed?

People are considered employed if they did any work at all for pay or profit during the survey reference week. This includes all part-time and temporary work, as well as regular full-time, year-round employment. Individuals also are counted as employed if they have a job at which they did not work during the survey week, whether they were paid or not.

People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.

 Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.

Institutionalized Population

People who are primarily ineligible, unable, or unlikely to participate in the labor force while residents of institutional group quarters. They reside in institutional group quarters such as adult correctional facilities, juvenile facilities, skilled-nursing facilities, and other institutional facilities such as mental (psychiatric) hospitals and in-patient hospice facilities.

Civilian and non-institutionalized adult population

Anyone over a certain age cut-off point (usually 16) who (a) isn't in the military, (b) isn't in jail or prison, (c) not living permanently in nursing homes, and (d) not in other institutions. That is (Total Population - Under 16 - Noninstitutionalized). In the context of the labor force, the non-institutionalized adult is the adults who are (a) working and on a payroll (i.e. employed people), or (b) actively seeking work (unemployed).

The Labor Force Participation Rate.

This measure is the number of people in the labor force as a percentage of the civilian noninstitutional population 16 years old and over. In other words, it is the percentage of the population that is either working or actively seeking work.

The Employment-Population Ratio.

This measure is the number of employed as a percentage of the civilian noninstitutional population 16 years old and over. In other words, it is the percentage of the population that is currently working