Preparing Balance Sheet

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Basic Principles of Preparing Final Account (Capital and Revenue) Learning Objectives
• To understand the meaning of capital expenditure
• To understand the meaning of revenue expenditure
Capital Expenditure
1. Capital expenditure is that expenditure the benefits of which are not fully consumed in a year but spread over several years. 2. It is the expenditure which results in the purchase or acquisition of asset or property. 3. It is the expenditure incurred in connection with the purchase of asset. 4. It is the expenditure incurred to bring an old asset into working condition. 5. It is the expenditure incurred for extending or improving an existing asset to increase its productivity or to increase the earning capacity of business or to decrease working expenditure. It can be said that the capital expenditure benefits not only in the current accounting year but also many years in the future. The expenditure is generally non-recurring and the amount spent is normally large. However, it should be noted that not every big expenditure is capital expenditure. Capital expenditures are shown in balance sheet. Revenue Expenditure

1. Revenue expenditure is the expenditure which benefits in the current accounting year. It is not carried forward to the next year or years. 2. It is the expenditure which is incurred in the normal course of business to run the business and to maintain the fixed assets of business. 3. It is the expenditure which is incurred on purchase of goods meant for resale or to purchase materials which will be used to convert them into final product. Therefore, revenue expenditure is a recurring expenditure made to maintain the business. The amount spent is generally small and the benefit is for a short period which is not more than a year. All revenue expenditure are charged to trading and profit and loss account. Deferred Revenue Expenditure

Deferred revenue expenditure is the expenditure which is originally revenue in nature but the amount spent is so large that the benefit is received for not a year but for many years. A proportionate amount is charged to profit and loss account of each year and balance is carried forward to subsequent years as deferred revenue expenditure. It is shown as an asset in the balance sheet, e.g., heavy expenditure incurred on advertisements. Capital Receipts

Capital receipts are the receipts which are not received in the ordinary course of business. These are non-recurring receipts. Money obtained from the sale of fixed assets or investments, issue of shares or debentures, loans taken are some of the examples of capital receipts. Capital receipts are shown as liability reduced from assets appearing in the balance sheet. Revenue Receipts

Revenue receipts are receipts obtained in the normal course of business. It is a receipt against supply of goods or services. The money obtained from sales, interest, dividend, transfer fees etc. are examples of revenue receipts. Revenue receipts are credited to profit and loss account. Capital Profit

Those profits which are not earned during the regular course of business and which are not earned on account of the day-to-day trading activities of the business are capital profits. For example, profit on sale of asset and premium received on issue of shares. These types of profits are normally not taken to profit and loss account but are shown in the liabilities side of the balance sheet. Capital Losses

The losses which are not suffered during the regular course of business are called capital losses. For example, discount on issue of shares. Problem 1
1. An old machinery is purchased for Rs. 1,00,000 and Rs. 25,000 has been spent to bring it in working condition. Answer-- Both the above expenses are capital expenditures as Rs. 1,00,000 has been spent to acquire the asset and Rs. 25,000 has been spent to make the machinery productive. The machinery will now be used for many years and its cost is Rs. 1,25,000. 2. A building is...
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