Accounts Presentation (1)

7/30/2019 Accounts Presentation (1)

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Classification Of Capital And

Revenue

After preparing trial balance, business preparesP/L A/C and the B/S to know the financial positionas at the end of a period.

There is a set rule that all the accounts appearing

in the trial balance are transferred either to theP/L A/C or to the B/S.

Which item will be transferred to the Trad. & P/LA/C and which to the B/S depends upon capitaland revenue nature of the ledger a/c appearing in

the trial balance. If we wrongly transfer an item of capital nature

treating as of revenue nature or vice versa, thenneither P/L A/C will reveal the correct profit orloss nor the B/S will reflect true financial position

of the business.


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Expenditure Receipts Reserves


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Capital expenditure is the amount spent by thebusiness on purchase of fixed assets that are

used to earn income and are not intended for

resale.

Fixed assets purchased may be tangible orintangible.

CAPITAL EXPENDITURE = PURCHASE OF

FIXED ASSET ( TANGIBLE + INTANGIBLE)

Capital exp. Yields benefit over a period

extending beyond the accounting period.


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i. The expenditure which results in acquiring or bringinginto existence an asset or advantage of enduring benefit.

ii. Expenditure in connection with the purchase, receipt or

erection of a fixed asset. All expenses, in addition to the

purchase price, incurred for making the asset ready for

use, are added to the cost of the asset and, thus, arecapital expenditure. Ex- wages paid to workers for

erecting machinery, overhaul of second-hand machinery

purchased, . IT IS TO BE NOTED THAT EXPENSES INCURRED

AFTER THE ASSETS HAS BEEN PUT TO USE ARE NOT

CAPITAL EXPENDITURE.iii. Expenditure for the extension of or improvement in

fixed asset. If because of any expenditure the profit-

earning capacity is increased , through lowering costs or

increasing output, the expenditure will be capital

expenditure.


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TYPES OF CAP. EXP.

iv. Expenditure incurred to acquire the right to carry onbusiness. The expenses necessary for either

establishing the business, like preliminary expenses for

floating a company, or obtaining license are capital

expenditure only the initial expenditure is capital;

renewal fee is revenue expenditure.v. Expenditure incurred to acquire a tangible asset. Even

if the asset does not prove to be profitable, the

expenditure on it is treated as capital expenditure.

vi. Legal charges incurred. Legal expenses incurred in

connection with acquiring or defending suits for

protecting fixed assets, rights, etc, are also treated as

capital expenditure.

CAPITAL EXPENDITURE IS DEBITED TO A FIXED A/C WHICH

APPEARS IN THE B/S.


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Revenue expenditure is the amount spent on running ofa business. In short expenditure, which is not capital exp

is revenue exp. The benefit of revenue exp is exhausted

in the accounting period in which it is incurred. The ex-

of such expenses are:

I. Expenses incurred for the day-to-day running of the

business such as rent, salaries, wages, power, and

fuel, etc.

II. Expenses incurred for upkeep of fixed assets.

III. Expenses incurred on purchase of stock of material

and goods to the extent these are used up during

the year; the remaining amount will be an asset.

IV. Depreciation or the expired cost of fixed assets.


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Basis Capital Expenditure RevenueExpenditure

1. Purpose It is incurred for acquisition

of fixed asset for use in

business.

It is incurred for the

conduct of business.

2. Capacity It increases the earning

capacity of the business.

It is incurred for earning

profits.

3. Period Its benefit extend to more

than one year.

Its benefit extends to

only one year.

4. Depiction Its shown in the balance

sheet.

Its is part of trading or

profit and loss account.


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To know whether any expenditure is a capitalexpenditure or revenue expenditures, some bases are

immaterial. One should not rely on them.

An Amount Of Payment. Usually the amount of

capital expenditure is more than revenueexpenditure. But it does not mean that if amount of

expense is small, it is certainly a revenue expenditure

and if amount of expenditure is big it is certainly a

capital expenditure.Payment Periodic or Lump-sum. Usually the

payment of capital expenditure is made at a time in

lump- sum. For ex- the purchase of land, while

revenue expenditure are paid repeatedly on time to

time , such as salary .


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Here again , it should not be concluded that if payment is

made repeatedly, it is a revenue expenditure only. It may

also be possible that the payment of an asset purchased

which is a capital expenditure, is made in fixed

installments.

Source Of Payment . Mostly the payment of capital

expenditure made out of capital while revenue

expenditure is paid out of revenue receipts. But it should

not be considered as a general rule that expenses paidout of capital are capital expenditure and expenses paid

out of revenue receipts are always revenue expenditure.

Its Nature In The Hands Of Recipient . To decide that

whether any expenditure is capital or revenue, it isuseless to see that the payment for the recipient is an

item of revenue or an item of expenditure. For ex- for a

sewing machine manufacturer, amount received from

sale of sewing machine is revenue receipt but for tailor

who purchases this machine, it is a capital expenditure.


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It is that class of revenue expenditure which is incurred during

an accounting period but, the benefit arising out of it extends

beyond that accounting period.

Such expenditure is unusually larger than the normalexpenditure under the head. An ex of this is large exp on

advertising on introducing a new product.

The expenditure so incurred will be certainly give benefit in

the periods beyond the accounting period in which theexpenditure was incurred.

It will be thus, proper to spread the expenditure over the

years and not charge the entire amount to the P/L A/C for the

year in which the expense is incurred.


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Sometimes even a large loss, arising from an

accident or other unforeseen circumstances,

may be spread over three or four years

instead of being charged wholly against the

revenue of the year in which the loss is

actually suffered. The loss of a building

because of an earthquake may be treated in

this manner. This type of loss is also treatedlike deferred revenue expenditure.

Deferred revenue expenditure is a fictitiousasset. Although it appears on the asset side of

B/S, it is not really an asset to the business.


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CAPITAL AND REVENUE

RECEIPT

CAPITAL RECEIPTS. Capital receipt are the amounts

received in the form of additional capital introduced

in the business, loans received and sale proceeds of

the fixed assets. You may observe that when loan is

received, it increases the business liability. Hence, it

cannot be treated as revenue. Sal e of fixed asset

reduces the fixed asset and amount received is not a

revenue earned in the normal course of business. In

fact, capital receipt do not affect the profit or loss of

the business. They either increase the liabilities or

reduce the asset. Hence, these are shown in the B/S

only.


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Revenue Receipt. These are the amounts in the

normal and regular course of business mainly by

sale of goods and services. An important featureof revenue receipt has been that the amount

received does not need to be returned to any

one. All such receipts are revenue and are

treated as incomes. Hence, these are shown onthe credit side of the P/L A/C.


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MEANINGThey are an appropriation of profits .

They are created to strengthen the financial

position and to meet unforeseen liabilities orlosses.

They are debited to P & L Appr. Account.

They are invested, may be, outside the

business. They are invested, may be , outside the

business.

Unutilized part can be distributed as dividend. It

reduces divisible profits.

They are created as a matter of prudence out


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IMPORTANCE OF

RESERVESReserves are important in business to strengthen thefinancial position of the concern. The creation of reserves

will enable the concern to tide over a difficult financial

period in future or to plough back profits which is a cost

free source of internal financing. The purpose of reservesmay be:

I. Expansion

II. Better financial position

III. Redemption of liabilitiesIV. Meeting unforeseen contingencies

V. Making dividends uniform from year to year ; and

VI. Meeting legal requirement such as Investment

Reserve required by the Income Tax law.


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REVENUE RESERVES AND

CAPITAL RESERVES

REVENUE RESERVES ARE CREATED OUT OF

REVENUE PROFITS WHICH ARE AVAILABLE FOR

DISTRIBUTION AS DIVIDENDS. EXAMPLE OFREVENUE RESERVES ARE:

1. GENERAL RESERVES

2. DIVIDEND EQUALISATION RESERVE

3. DEBENTURE REDEMPTION RESERVE

4. INVESTMENT FLUCTUATION RESERVE,


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CAPITAL RESERVES ARE CREATED OUT OF

CAPITAL PROFITS AND ARE NORMALLY NOT

AVAILABLE FOR DISTRIBUTION AS CASH

DIVIDENDS. EXAMPLES OF CAPITAL RESERVES

ARE:

1. PROFIT PRIOR TO INCORPORATION

2. PREMIUM ON ISSUE OF SHARES OR

DEBENTURES3. PROFIT ON REDEMPTION OF DEBENTURES

4. PROFIT ON FORFEITURE OF SHARES

5. PROFIT ON SALE OF FIXED ASSETS

6. CAPITAL REDEMPTION RESERVES, AND7. PROFIT ON REVALUATION OF FIXED ASSETS

AND LIABLITIES.


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THE DIFFERENCE.BASIS REVENUE RESERVES CAPITAL RESERVES

1. SOURCE. It is created out of

business profits.

It is created out of

capital profits.

2.

DIVIDEND

It can be used for

distribution of dividendswithout any

precondition.

It can be used for

distribution of dividendsonly if the co satisfies

certain condition

prescribed by the

companies act.

3. PURPOSE It is created for

strengthening the

financial position , and

meeting contingencies

or some specific purpose.

It is created for meeting

capital losses or to be

used for purposes

specified by Companies

Act.

Documents

Accounts Presentation (1)