Distinguish between Capital expenditure and revenue expenditure

Capital expenditure revenue expenditure

1. It results in acquisition of fixed
asset which are meant for use and
not for resale. The assets acquired
are used for earning profit.
2. It results in improving the earning
capacity of faxed asset.
. It represents unexpired cost. I.e.
cost of benefit to be ta!en in future
yr.
". It is a non recurring expenditure
benefit of such expenditure will be
for more than one yr. only a portion
of such expenditure is charged to
the #$% a&c
'. (ll items of capital expenditure
which are not written off are shown
in the )&* as asset and are carried
forward to the next yr.
1. It does not result in acquisition of
fixed assets. This expenditure is
incurred fort meeting the day to day
expense of earning on operation of
business.
2. it helps in maintaining the existing
capacity of assets through repair
maintenance
. It represents the expired cost+ i.e.
benefit of cost has been fully utili,ed
in that yr itself.
". It is a recurring expenditure. The
benefit of such expenditure expires
during the yr and the amount is
charged to revenue account of the
same yr.
'. (ll items of revenue expenditure+ the
benefit of which has exhausted during
the yr are transferred to the trading
profit and loss account.
2. -hat is the ob.ect of preparing final accounts/
)&* is a statement prepared with a view to measure the financial position of a
business on a certain date. The financial position of a concern is indicated by its
asset on a given date and its liabilities on that date. 0xcess of assets over liabilities
presents the capital and is indicative of financial soundness of a company.
1b.ect or need of preparing 2inal accounts
2inancial position

The main purpose of preparing the final accounts is to ascertain the
financial position of a business on a certain date. The financial soundness is
indicated by excess of assets over liabilities
3ature and amount of liabilities
1n the left hand side of the balance sheet+ the several
liabilities describe how much capital was obtained from trade creditors+
ban!ers etc. The owner4s equity section shows the capital supplied by the
owner
To ascertain the nature and the value of asset owned.
To ascertain the wor!ing capital of a business

-or!ing capital is the amount of fund necessary to cover the cost
of operating the enterprise. 0xcess of current asset over current liabilities is
indicated by wor!ing capital.
To ma!e assessment of the progress of the business by ma!ing comparison
with different accounting ratio.
To find the solvency of business
To !now the source and application of funds.
These are the ob.ect of preparing final accounts.
. -hat do you understand by operating and non operating income/
Indirect expense to be shown on the debit side of #$% a&c can also be
divided into 2 categories5
(n operating expense is a day6to6day expense such as sales and administration+ or research
$ development+ as opposed to production+ costs+ and pricing. In short+ this is the
money the business spends in order to turn inventory into throughput. 1perating
expenses also include depreciation of plants and machinery which are used in the
production process.
3on operating expenses are those which are not required to be incurred for efficient and
smooth operation of the business but still shown on the debit side of #$% a&c.
These include loss on sale of fixed asset writing off tangible and intangible assets.
Indirect incomes to be shown on the credit side of #$% a&c can also be divided into
operating income and non operating income.
". -hat is the difference between operating profit and net profit/
#rofit generated by a company7s operations before interest payments and tax is
called operating profit. 1perating profit is closely related to 0)IT+ and is usually
the same. There may be a difference between 0)IT and operating profit. It is
almost always small. It comes from the exclusion from operating profit of certain
profits or losses that are not part of the operations of a business 8 such as profits
on the sale of businesses.
It is the ultimate arrived at after changing all business expenses including non
operating and purely financial expenses. 3et profit includes non operating income
too.
3et profit9 operating profit6 non operating expense : non operating income
'. -rite the importance of trading a&c and #$% a&c/
The first section of trading and profit and loss account is called trading account.
The aim of preparing trading account is to find out gross profit or gross loss while
that of second section is to find out net profit or net loss.
;ross #rofit 9 *ales6Cost of goods sold or <*ales : Closing *toc!= 6 <*toc! in the
beginning : #urchases : Direct 0xpenses=
The ratio of gross profit to sales is very significant5 it is arrived at5
;ross #rofit > 1?? & *ales
It helps in5
Comparison of gross profit with operating profit
Information as to gross profit&loss of the business
Comparison of current profit with past profit
2ixation of selling price
Profit and loss account
The purpose of the profit and loss account is to5
*how whether a business has made a PROFIT or LOSS over a financial
year.
Describe how the profit or loss arose @ e.g. categori,ing costs between
cost of sales and operating costs.
It helps in5
Information of net profit or loss
Aelpful in preparing balance sheet
Aelpful in future growth of business
B. -hat is the use of manufacturing account/
In order to have information regarding cost of goods manufactured these concerns
firstly prepare manufacturing account and then prepare trading and #$% account.
The main uses are5
It shows the cost of finishes goods produced.
It shows the constituent items such as cost of materials consumed+
productive wages+ direct and indirect expenses.
C. )alance sheet is a statement of resources. 0xplain/
( b&* is also termed as a statement showing the resources and the application of
capital. It is the statement and not an a&c and are prepared from real and personal
a&cs. The left hand side of a )&* may be viewed as a description of sources from
which the business has obtained the capital and the right side as a description of
the form in which that is invested on a specific date.
Thus )alance sheet is a statement of resources
D. -hat do you understand by marshalling assets and liabilities/ ;ive two bases
of doing the same/
The arrangements of assets and liabilities in certain groups and in a
particular order are called grouping and marshalling of )&* of a business. It is done
in 2 ways
1. in the order of liquidity
2. in the order of performance
E. -hat do u understand by intangible and fictitious assets. ;ive eg/
(sset created by an accounting entry <and included under assets in the
balance sheet= that has no tangible existence or reali,able value but represents actual cash
expenditure. The purpose of creating a fictitious asset is to account for expenses <such as
those incurred in starting a business= that cannot be placed under any normal account
heading. 2ictitious assets are written off as soon as possible against the firm7s earnings. 2or
e.g. *hare Issue 0xpenses Discount of Issue of Debentures etc. (lso the debit balance of
#rofit and %oss (ccount <loss= is a 2ictitious (sset. #reliminary expenses etc.
*omething of value that cannot be physically touched+ such as a brand+ franchise+
trademar!+ or patent is called as intangible assets. (n asset that is not physical in nature.
Corporate intellectual property <items such as patents+ trademar!s+ copyrights+ business
methodologies=+ goodwill and brand recognition are all common intangible assets in
today7s mar!etplace. (n intangible asset can be classified as either indefinite or definite
depending on the specifics of that asset. ( company brand name is considered to be an
indefinite asset+ as it stays with the company as long as the company continues operations.
Aowever+ if a company enters a legal agreement to operate under another company7s
patent+ with no plans of extending the agreement+ it would have a limited life and would be
classified as a definite asset.
1?. Contingent liabilities and Contingent assets
( contingent liability may or may not be liability to the company. It is
mandatory to show in )alance *heet. ( footnote to the balance sheet describes the
nature and extent of the contingent liabilities.
(n asset in which the possibility of an economic benefit depends
solely upon future events that can7t be controlled by the company. Due to the
uncertainty of the future events+ these assets are not placed on the balance sheet.
Aowever+ they can be found in the company7s financial statement notes.
1?. #repaid expense and deferred expense
prepaid expenses are bills that are paid in advance. #repaid expenses are
assets that become expenses as they expire or get used up. 2or example+ office
supplies are considered an asset until they are used in the course of doing business+
at which time they become an expense. (t the end of each accounting period+
ad.usting entries are necessary to recogni,e the portion of prepaid expenses that
have become actual expenses through use or the passage of time
Deferred expense refers to an item that will initially be recorded as an
asset but is expected to become an expense over time and&or through the normal operations of
the business. 1ne of the most basic concepts of accounting involves determining if an item is
an asset or a liability. e.g.5 #aying the insurance premium prior to the start of the coverage
period gives rise to a deferred expense.
11. 2ixed asset and current asset/
2ixed asset+ also !nown as a non6current asset or as property+ plant+ and
equipment <##$0=+ is a term used in accounting for assets and property which
cannot easily be converted into cash.
( current asset is an asset on the balance sheet which can either be
converted to cash or used to pay current liabilities within 12 months. Typical
current assets include cash+ cash equivalents+ short6term investments+ accounts
receivable+ inventory and the portion of prepaid liabilities which will be paid
within a year.
12 2eatures of )alance sheet/
)alance sheet may be defined as the financial statement that summari,es the
financial position of the business at a given point in time. It may also be defined as
the statement that describes the sources of funds <liabilities= and the uses of these
funds <assets= so in other words the balance sheet gives the financial picture as5
Total (ssets 9 Total %iabilities : Total Capital
(s mentioned the Fain features or elements of a balance sheet include5
1. (ssets
2. %iabilities
. Capital&0quity
(ssets 6 are the possessions of the company or a business these can be of various
types such as fixed6assets which include land and machinery+ the current assets are
those which are easily converted into cash and include6 cash+ stoc!s+ receivables
etc.
%iabilities 6 is the debt of the company. These are also of different types such as
current liabilities which includes accounts payable+ short6term debt etc. *imilarly
liabilities can be of intermediate term and long term. Capital&0quity 6 represents
the ownership of the business in terms of shares or stoc!s. *o on the whole+ the
balance sheet portrays a good picture of the financial position of a firm
12. 1utstanding expense and unexpired expense/ (d.usting entry of outstanding
salary/
Those expenses which have been paid in advance and whose benefit will be
available in future are called unexpired or prepaid expenses. e.g. insurance
premium
The expenses remaining unpaid at the end of the accounting period are called
outstanding expenses. Certainly expenses li!e salaries+ rent etc. of the every month
will be paid in the next months.
(d.ust entry5 salary a&c Dr
To outstand salary
1. Trial balance and balance sheet
( balance sheet is one of the main financial statements and is also !nown
as the statement of financial position. The balance sheet is referred to as an
external report because it is used outside of the company by investors+ lenders+ and
others. The balance sheet also shows that the total of the asset amounts is equal to
the total of the amounts of liabilities and stoc!holders4 equity.
( trial balance is an internal document used only within the accounting
department. Its purpose is to show that the amounts of debits and credits within the
accounting system are equal. The trial balance consists of three columns5 the first
column lists every account title having an account balanceG the second column is
for account balance if it is a debit balance+ and the third column is for the account
balance if it is a credit balance. The amounts in the debit column are summed and
the amounts in the credit column are summed. The total amount of each column
should be the same.

1". 1utstanding income and accrued income/
(ccrued income is an amount that has been 1= earned+ 2= there
is a right to receive the amount+ and = it has not yet been recorded in the general
ledger accounts. 1ne example of accrued income is the interest earned on a bond
investment.
Income which has been earned but not received during the
accounting yr is outstanding income. 0.g. it is otherwise called accrued income.
1'. Depreciation

It is the reduction in the value of fixed asset due to its use+ wear and tear
or obsolescence. -hen an asset is used for earnEiing purpose it is necessary that
reduction due to its use must be charged to #$% of that yr in order to show the
current #$% and to show the asset of its current value of asset.
1B. limitations of financial statements
historical data
it does not show the real value of assets
shows items li!e preliminary exps which does not have any value
some imp qualitative elements are omitted
arbitrary and sub.ective assessment
1C. #rovision for bad debts/
*ometimes a merchant finds on the last day of the accounting yr that certain debts
are doubtful i.e. amount to be recovered may or may not be received+ it is one of
the golden principle of accountancy that the anticipated losses be provided for. *o
provision for doubtful debts is generally made on the basis of some percentage
which is fixed on the basis of past experience.
1D. Aidden ad.ustments/
There are certain items given in the trial balance and require ad.ustment
though especially no ad.ustment is given relating to such items. Those
ad.ustments are given clearly !nown as self evident ad.ustments. (nd
ad.ustments hidden in the T&) are called hidden ad..