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.

3. It represents unexpired cost. I.e. cost of benefit to be taken in future yr.

4. 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 P&L a/c

5. All items of capital expenditure which are not written off are shown in the B/S 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

3. It represents the expired cost, i.e. benefit of cost has been fully utilized in that yr itself.

4. 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.

5. All items of revenue expenditure, the benefit of which has exhausted during the yr are transferred to the trading profit and loss account.

2. What is the object of preparing final accounts?

B/S 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. Excess of assets over liabilities presents the capital and is indicative of financial soundness of a company.Object or need of preparing Final accounts

Financial 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

Nature and amount of liabilities

On the left hand side of the balance sheet, the several liabilities describe how much capital was obtained from trade creditors, bankers etc. The owner’s equity section shows the capital supplied by the owner

To ascertain the nature and the value of asset owned. To ascertain the working capital of a business

Working capital is the amount of fund necessary to cover the cost of operating the enterprise. Excess of current asset over current liabilities is indicated by working capital.

To make assessment of the progress of the business by making comparison with different accounting ratio.

To find the solvency of business To know the source and application of funds.

These are the object of preparing final accounts.

3. What do you understand by operating and non operating income?

Indirect expense to be shown on the debit side of P&L a/c can also be divided into 2 categories:

An operating expense is a day-to-day 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. Operating expenses also include depreciation of plants and machinery which are used in the production process.

Non 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 P&L 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 P&L a/c can also be divided into operating income and non operating income.

4. What is the difference between operating profit and net profit?

Profit generated by a company's operations before interest payments and tax is called operating profit. Operating profit is closely related to EBIT, and is usually the same. There may be a difference between EBIT 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 — 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. Net profit includes non operating income too.

Net profit= operating profit- non operating expense + non operating income

5. Write the importance of trading a/c and P&L 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.

Gross Profit = Sales-Cost of goods sold or (Sales + Closing Stock) - (Stock in the beginning + Purchases + Direct Expenses)

The ratio of gross profit to sales is very significant: it is arrived at:

Gross Profit X 100 / Sales

It helps in:

Comparison of gross profit with operating profit Information as to gross profit/loss of the business

Comparison of current profit with past profit

Fixation of selling price

Profit and loss account

The purpose of the profit and loss account is to:

Show whether a business has made a PROFIT or LOSS over a financial year.

Describe how the profit or loss arose – e.g. categorizing costs between “cost of sales” and operating costs.

It helps in:

Information of net profit or loss Helpful in preparing balance sheet

Helpful in future growth of business

6. What 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 P&L account.

The main uses are:

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.

7. Balance sheet is a statement of resources. Explain?

A b/S 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 B/S 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 Balance sheet is a statement of resources

8. What do you understand by marshalling assets and liabilities? Give 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 B/S of a business. It is done in 2 ways

1. in the order of liquidity

2. in the order of performance

9. What do u understand by intangible and fictitious assets. Give eg?

Asset created by an accounting entry (and included under assets in the balance sheet) that has no tangible existence or realizable 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. Fictitious assets are written off as soon as possible against the firm's earnings. For e.g. Share Issue Expenses Discount of Issue of Debentures etc. Also the debit balance of Profit and Loss Account (loss) is a Fictitious Asset. Preliminary expenses etc.

Something of value that cannot be physically touched, such as a brand, franchise, trademark, or patent is called as intangible assets. An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's

patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.

10. Contingent liabilities and Contingent assets

A contingent liability may or may not be liability to the company. It is mandatory to show in Balance Sheet. A footnote to the balance sheet describes the nature and extent of the contingent liabilities.

An asset in which the possibility of an economic benefit depends solely upon future events that can't be controlled by the company. Due to the uncertainty of the future events, these assets are not placed on the balance sheet. However, they can be found in the company's financial statement notes. 

10. Prepaid expense and deferred expense

prepaid expenses are bills that are paid in advance. Prepaid expenses are assets that become expenses as they expire or get used up. For example, office supplies are considered an asset until they are used in the course of doing business, at which time they become an expense. At the end of each accounting period, adjusting entries are necessary to recognize 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. One of the most basic concepts of accounting involves determining if an item is an asset or a liability. e.g.: Paying the insurance premium prior to the start of the coverage period gives rise to a deferred expense.

11. Fixed asset and current asset?

Fixed asset, also known as a non-current asset or as property, plant, and equipment (PP&E), is a term used in accounting for assets and property which cannot easily be converted into cash.

A 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, short-term investments, accounts receivable, inventory and the portion of prepaid liabilities which will be paid within a year.

12 Features of Balance sheet?

Balance sheet may be defined as the financial statement that summarizes 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 as:

Total Assets = Total Liabilities + Total CapitalAs mentioned the Main features or elements of a balance sheet include:1. Assets2. Liabilities3. Capital/Equity

Assets - are the possessions of the company or a business these can be of various types such as fixed-assets which include land and machinery, the current assets are those which are easily converted into cash and include- cash, stocks, receivables etc.

Liabilities - is the debt of the company. These are also of different types such as current liabilities which includes accounts payable, short-term debt etc. Similarly liabilities can be of intermediate term and long term. Capital/Equity - represents the ownership of the business in terms of shares or stocks. So on the whole, the balance sheet portrays a good picture of the financial position of a firm

12. Outstanding expense and unexpired expense? Adjusting 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 like salaries, rent etc. of the every month will be paid in the next months.

Adjust entry: salary a/c Dr

To outstand salary

13. Trial balance and balance sheet

A balance sheet is one of the main financial statements and is also known 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 stockholders’ equity.

A 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 columns: the first column lists every account title having an account balance; 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.

14. Outstanding income and accrued income?

Accrued income is an amount that has been 1) earned, 2) there is a right to receive the amount, and 3) it has not yet been recorded in the general ledger accounts. One 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. E.g. it is otherwise called accrued income.

15. Depreciation It is the reduction in the value of fixed asset due to its use, wear and tear or obsolescence. When an asset is used for earn9iing purpose it is necessary that reduction due to its use must be charged to P&L of that yr in order to show the current P&L and to show the asset of its current value of asset.

16. limitations of financial statements

historical data it does not show the real value of assets shows items like preliminary exps which does not have any value some imp qualitative elements are omitted

arbitrary and subjective assessment

17. Provision for bad debts?Sometimes 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. So provision for doubtful debts is generally made on the basis of some percentage which is fixed on the basis of past experience.

18. Hidden adjustments? There are certain items given in the trial balance and require adjustment though especially no adjustment is given relating to such items. Those adjustments are given clearly known as self evident adjustments. And adjustments hidden in the T/B are called hidden adj.